Mutual funds offer a convenient way to diversify investments without requiring deep market knowledge. However, not all mutual funds perform equally. To make informed decisions, investors must analyze key metrics such as historical returns, expense ratios, risk-adjusted performance, and portfolio composition.
Table of Contents
1. Understanding the Basics: What Makes a Good Mutual Fund?
Before diving into comparisons, let’s establish key evaluation criteria:
A. Performance Metrics
- Annualized Returns: The average yearly return over a specific period.
- Risk-Adjusted Returns: Measures like the Sharpe ratio (Sharpe\ Ratio = \frac{R_p - R_f}{\sigma_p}, where R_p is portfolio return, R_f is risk-free rate, and \sigma_p is standard deviation).
- Alpha & Beta: Alpha measures excess return vs. a benchmark; Beta measures volatility relative to the market.
B. Cost Efficiency
- Expense Ratio: Annual fees as a percentage of assets.
- Turnover Ratio: How frequently assets are traded, impacting tax efficiency.
C. Portfolio Composition
- Sector Allocation: Exposure to tech, healthcare, finance, etc.
- Market Cap Distribution: Percentage in large, mid, or small-cap stocks.
D. Historical Consistency
- Performance across bull and bear markets.
Now, let’s apply these to our three funds.
2. Performance Comparison: Returns, Risk, and Efficiency
A. Historical Returns (10-Year Period, as of 2023)
| Fund | 1-Yr Return | 5-Yr CAGR | 10-Yr CAGR |
|---|---|---|---|
| VFIAX (S&P 500) | 8.5% | 10.2% | 12.1% |
| FCNTX (Contrafund) | 6.8% | 9.7% | 11.4% |
| AGTHX (Growth of America) | 7.2% | 8.9% | 10.8% |
Data sourced from Morningstar (2023).
Key Takeaway:
VFIAX, being an index fund, outperformed both active funds over 10 years. This aligns with research showing that most active funds underperform their benchmarks long-term.
B. Risk-Adjusted Returns (Sharpe Ratio)
Assuming a risk-free rate of 2%:
- VFIAX: Sharpe = \frac{12.1 - 2}{15} = 0.67
- FCNTX: Sharpe = \frac{11.4 - 2}{16} = 0.59
- AGTHX: Sharpe = \frac{10.8 - 2}{14} = 0.63
Interpretation:
VFIAX offers better returns per unit of risk, though AGTHX is close. FCNTX lags slightly.
C. Expense Ratios and Costs
| Fund | Expense Ratio | Turnover Ratio |
|---|---|---|
| VFIAX | 0.04% | 4% |
| FCNTX | 0.86% | 29% |
| AGTHX | 0.62% | 25% |
Analysis:
VFIAX is the cheapest, which compounds significantly over time. For a $100,000 investment:
- VFIAX costs $40/year.
- FCNTX costs $860/year.
- AGTHX costs $620/year.
Higher expenses eat into net returns, making low-cost index funds attractive.
3. Portfolio Composition: Where is Your Money Invested?
A. Sector Allocation (2023 Data)
| Sector | VFIAX | FCNTX | AGTHX |
|---|---|---|---|
| Technology | 28% | 42% | 32% |
| Healthcare | 13% | 16% | 18% |
| Financials | 12% | 8% | 10% |
| Consumer Discretionary | 10% | 15% | 12% |
Observation:
FCNTX is heavily tech-weighted, which explains its higher volatility. AGTHX is more balanced, while VFIAX mirrors the S&P 500.
B. Top Holdings
| VFIAX (Top 5) | FCNTX (Top 5) | AGTHX (Top 5) |
|---|---|---|
| Apple (7%) | Meta (10%) | Microsoft (8%) |
| Microsoft (6%) | Alphabet (9%) | Apple (7%) |
| Amazon (3%) | Amazon (7%) | Nvidia (5%) |
Takeaway:
FCNTX has concentrated bets on a few tech giants, increasing risk. VFIAX and AGTHX are more diversified.
4. Tax Efficiency and Turnover
- VFIAX has minimal turnover (4%), making it tax-efficient.
- FCNTX and AGTHX have higher turnover (29% and 25%), leading to potential capital gains distributions.
Example:
If FCNTX realizes $50,000 in capital gains, shareholders must pay taxes even if they didn’t sell shares.
5. Which Fund is Right for You?
Choose VFIAX If:
- You want low-cost, passive exposure to the S&P 500.
- You prefer tax efficiency and lower fees.
Choose FCNTX If:
- You believe in active management and tech growth.
- You can tolerate higher volatility and costs.
Choose AGTHX If:
- You want a balanced active fund with moderate fees.
- You seek a mix of growth and value stocks.
Final Thoughts
While past performance doesn’t guarantee future results, VFIAX’s low costs and consistent returns make it a strong core holding. FCNTX and AGTHX may appeal to those willing to pay higher fees for active management, but they come with added risks.
Before investing, assess your risk tolerance, time horizon, and cost sensitivity. A mix of index and active funds could also be a viable strategy.
