Returns on mutual funds differ based on fund category and prevailing market dynamics. Each fund type can perform uniquely as market conditions change, resulting in varying averages across equity, debt, and hybrid funds. Even though stock funds might give two-digit mutual fund returns over a long period, bond and hybrid funds usually offer more modest but stable returns. Want to know how various mutual fund categories have performed and what affects their returns? Read now!
What Is the Average Return on Mutual Funds?
Average returns from mutual funds are shaped by the fund’s investment style and current market conditions. Performance can differ significantly depending on whether the fund invests in equities, debt, or other assets, as well as shifts in the broader economy.
Let’s see 5-year average returns for mutual fund categories as of September 10, 2025:
| Fund Type | Category | 5-Year Avg Return (%) |
| Equity Mutual Funds | Large-cap | 18.93 |
| Mid-cap | 26.68 | |
| Small-cap | 29.61 | |
| Debt Mutual Fund | Short-duration | 6.38 |
| Long-duration | 5.49 |
The returns change with economic cycles, so always compare mutual fund performance against benchmarks and review risk carefully. Previous results are not assured to repeat in future periods, as investment outcomes can change due to shifting market conditions and other factors.
Understanding Mutual Fund Returns
Mutual fund returns indicate a profit or loss on an investment over a specific period and can be computed in a variety of ways.
- Absolute Return: The easiest way is absolute return, which indicates the total percentage change of the investment’s value without considering the investment duration. This approach is suited for analysing periods shorter than one year.
- Annualised Return / CAGR: If the time period is longer, the annualised return or the compound annual growth rate (CAGR) is taken into account. This reflects the average yearly return by smoothing out fluctuations, giving a clearer picture of growth over time.
Understanding these methods is important for assessing mutual fund performance, but past returns are not a guarantee of future outcomes.
Average Returns by Fund Type
Mutual fund returns are subject to change depending on market trends and the internal management of the fund. Nevertheless, past data is like a lighthouse: it shows us the performance over time. Let’s see the return ranges observed across various mutual fund categories based on recent market data and historical trends.
Equity Funds
Equity funds, which invest mainly in shares, have historically generated annualised returns between roughly 9% and 12% over the long term. Some segments, like mid-cap and small-cap funds, may occasionally exceed these returns, although performance can vary significantly year to year due to market volatility. This volatility arises because equity prices depend on market sentiment and business performance, but over time they offer better returns as companies grow and profits compound.
Bond Funds
Bond funds, which focus on fixed-income investments, are usually more stable and offer lower returns. Their returns are around 3% to 5% annually over extended periods. Change in interest rate and the credit quality are the two major variables impacting these returns. They are relatively stable since fixed interest payments make income predictable, though this comes at the cost of lower long-term growth.
Hybrid / Index Funds
Hybrid funds, combining equity and debt, and index funds that track market benchmarks generally deliver average returns in the range of 5% to 8%. This group aims to provide a balance between risk and reward, making them moderately volatile compared to pure equity funds.
Recent U.S. Mutual Fund Averages
In 2025, U.S. mutual funds have achieved average returns of around 13%. The total market assets have increased to more than $30 trillion, which indicates investors’ confidence and steady inflows of capital.
Mid-cap and small-cap funds have recently shown stronger performance compared to their peers, with only about a quarter of mid-cap funds and just over one-fifth of small-cap funds falling short of their benchmark returns as of mid-2025. This marks a notable improvement from past years and highlights the significant growth potential within these market segments.
This performance is supported by favourable market conditions and a variety of fund options, enabling investors to pursue sustained growth. As economic developments continue, mutual funds remain a preferred choice for those seeking balanced exposure and the opportunity to build wealth over time.
Calculation Methods: AAR, CAGR, Trailing Returns
Mutual funds calculate returns using different methods, each providing a unique understanding of investment performance:
- Absolute Annual Return (AAR): This represents the total percentage change of an investment over a period of time without considering how long it was held. It is a straightforward measure and is appropriate for short-term investments.
Absolute Return = (Current Value − Initial Value / Initial Value) × 100
- Compound Annual Growth Rate (CAGR): CAGR shows the mean annual rate at which an investment grows, factoring in reinvested earnings and yearly compounding. It is a tool for tracking long-term investment progression, providing a continuous growth graph that smooths out market volatility.
CAGR = ( Ending Value / Beginning Value) ^ 1 / Number of Years – 1
- Trailing Returns: These show the returns a mutual fund has generated over specific previous periods, for instance, the last 1, 3, or 5 years. Trailing returns allow investors to assess how a fund has performed over a defined recent period, offering insight into its short-term results.
Market Context: S&P 500 & Benchmark Returns
As of 2025, the S&P 500 has achieved a 9.8% year-to-date return, which signals a stable performance in line with its historical average of annual returns of about 10% over the long term.
The index combines 500 top U.S. large-cap companies and is a major benchmark for the equity markets, offering investors a broad market overview.
Despite the fact that some sectors within the index, such as finance, industrials, utilities, and consumer staples, have performed better, overall results are in line with expectations based on solid corporate earnings growth and a generally stable economic backdrop.
These returns should be viewed as a neutral reference point for investors, similar to how market indices like the Nifty 50 and Sensex serve as benchmarks for mutual funds to gauge their performance, rather than as a signal for immediate action or market speculation.
Influencing Factors: Risk, Expenses, Asset Allocation
Some of the key factors that influenced mutual fund performance are:
- Risk: The level of unpredictability in returns can vary according to the specific asset class involved. A fund with a higher risk, like equities, may deliver more significant returns, but with more volatility; on the other hand, lower-risk debt funds tend to have steadier but smaller returns.
- Expenses: These include charges like administration and management fees that are applied for overseeing the fund’s operations. When expenses increase, the final returns received by investors tend to decrease. Therefore, the expense ratio is an essential factor to be considered.
- Asset Allocation: The way in which the investments are distributed among the different asset classes has an impact on both the risk and the return. Proper diversification helps to balance the potential growth with risk mitigation.
Evaluating these aspects helps in judging how a fund may perform, but it’s important to recognise that previous outcomes do not ensure similar results ahead.
Conclusion
The average return on mutual funds varies significantly based on fund type, market conditions, and investment duration. Equity funds often provide greater long-term growth potential, whereas debt and hybrid funds offer more stable returns with moderate gains. Evaluating mutual funds requires understanding their benchmarks and performance trends objectively.
FAQ‘s
The average return on mutual funds is different for each type and depends on market conditions. The returns are usually around 9-12% annually. However, returns are not stable and can vary depending on the risk, expenses, and asset allocation. Therefore, investors should take these factors into account before making any investment.
Equity mutual funds in India commonly achieve annual returns in the range of 9% to 12%, with some funds delivering higher performance depending on market trends and category.
In India, a good average return to expect from bond funds is generally between 6% and 8% per year. The returns are quite stable when compared with equities; however, they may change according to the interest rate, credit quality, and the type of the fund.
Average mutual fund returns are calculated through various methods such as absolute return, annualised return, and CAGR. Absolute return indicates the total gain or loss, annualised return accounts for time, and CAGR reflects average annual growth assuming compounding, providing a clearer long-term performance measure.
The S&P 500 is commonly used as a benchmark to measure the performance of a portfolio or the stock market as a whole. It generally has a return of about 10% annually over the long term. Mutual funds may aim to outperform or match this benchmark, but their returns vary due to active management, fees, and asset selection. Overall, S&P 500 funds provide a low-cost, broad market exposure with steady performance.
The returns on mutual funds are dependent on various factors like market conditions, economic cycles, the fund manager’s expertise, expense ratios, and asset allocation. Moreover, risk appetite, investment horizon, and regulatory changes are also the key elements that contribute to fund performance.
