Compiling the data for this year’s Top Funds Guide, we noticed comparatively lower returns for many fund categories. Though 15 categories showed gains, none of their figures were higher in 2015 than in 2014. Furthermore, 33 of the 71 categories ended 2015 in negative territory, an increase from eight in 2014.

Some individual investors reacted to the weak performance by pulling money out of domestic stock funds. The total amount of purchases (inflows) less redemptions (outflows), called “fund flow,” turned negative for domestic stock funds in March and stayed negative throughout the remainder of 2015.

But net redemptions weren’t limited to domestic stock funds last year. Total fund flow turned negative in July and stayed negative throughout the remainder of the year. In aggregate, mutual funds incurred $47 billion in outflows during the first 11 months of 2015. The Investment Company Institute (ICI) estimates that an additional $78 billion was pulled from mutual funds in December. [To put these numbers into perspective, total net assets in mutual funds were $15.9 trillion at the end of November. In comparison, the total net assets in exchange-traded funds (ETFs) were just $2.1 trillion.]

The outflow from mutual funds only exacerbated a difficult year for fund managers. During 2015, domestic large-cap mutual funds outperformed small- and mid-cap funds; however, all three categories ended the year in negative territory. Global stock, regional/country stock and emerging market stock category averages were also down for 2015.

Not all funds experienced outflows, however. According to Morningstar, Vanguard had the largest annual inflow of money ever to a mutual fund company during 2015. Vanguard enjoyed a record inflow of $236 billion to its fund family.

In recognition of how poorly stocks performed in the second half of 2015, we have set the bull market return end date as May 31, 2015—just days after the S&P 500 index set its current record high. From that date forward we have been watching market activity to gauge its direction. A bear market for large-cap stocks has not begun, but the ongoing correction has arguably not ended either.

Despite fund outflows, there were some bright spots during 2015. Twenty-two funds out of the top 50 performers tracked had double-digit gains in 2015.

Health sector funds remained the best-performing category for a third consecutive year, up 7.8% on average. Technology sector funds gained 5.8% on average, and high-yield muni national bonds were up 4.4% on average.

Another bright spot was lower expenses for mutual funds during 2015. Of the 71 category averages tracked in both 2014 and 2015, 57 categories saw a decline in average expense ratio, compared to 14 categories with increased expenses. Keep in mind that changes in the composition of a category can influence its average.

The number of funds in the print version was limited to 734, about the same as last year, due to space. More information covering nearly 1,600 funds is available online, including R-squared (a measure of how closely a manager follows his benchmark). In both formats, each mutual fund is classified into a useful category of similar funds to enable comparisons.

How to Use This Guide

Selecting a mutual fund, while less time-consuming than investing in individual securities, does require some homework. No one should put money into an investment that is not understood. This does not require a detailed investigation of the fund’s investments, but it does require an understanding of the fund’s investment objective, strategy, risks and performance history.

Individuals new to mutual fund investing can find explanatory articles in the Funds/ETFs section of AAII.com (www.aaii.com/investing/funds-etfs).

Performance tables are included below. Table 1 lists the total return performance of common index benchmarks. Table 2 summarizes average performance and risk of the fund categories used in this guide. Table 3 allows you to compare the performance of the 50 most widely held funds (funds with the highest total assets). Table 4 lists the 50 best-performing funds of 2015 and Table 5 lists the 50 worst-performing funds of 2015. While past performance is no indication of future performance, it may attest to the quality and consistency of fund management.

Funds are grouped by category and listed alphabetically within each category; the ticker symbol is indicated after each fund name. The listings provide information on a variety of return and risk data, portfolio composition, and fees and expenses. Index funds are indicated by the letter “I” before the fund name, and funds that are closed to new investors are indicated by the letter “C.” (A description of each category is included here.)

If you would like to request a copy of a fund prospectus and annual report, telephone numbers and website addresses of the fund families are provided here. Make sure you read the prospectus carefully before investing in any mutual fund.

Which Funds Were Included

The funds that appear in the Guide were selected from the universe of open-end funds tracked through NASDAQ. The following are the various screens we used for the final selection.

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Historical Record

Generally, only those funds with three full years of data are included in the Guide so that there is a performance record of significant length and all performance measures can be calculated. Index funds with less than three full years may be included, as well as specialty funds that are of great interest to our members.

Size

Funds must appear in the NASDAQ mutual fund listings and are generally required to have at least $50 million in assets to qualify for inclusion in the Guide. A small number of funds with assets below $50 million may be included in some of the newer categories tracked in this Guide.

Loads

The decision as to what constitutes a significant load is difficult, but we took this approach in the Guide:

Funds with front-end loads, back-end loads or redemption fees of 3% or less are included if the fund does not also have a 12b-1 charge. Funds with redemption fees that disappear after six months that also have 12b-1 charges appear in this Guide.

Funds with 12b-1 plans and no front- or back-end loads are included in the Guide; we note, however, whether the fund has a 12b-1 fee and what the actual charge is per year. A 12b-1 fee of greater than 0.25% is considered to be high, and we exclude these funds from the Guide. Investors should carefully assess these fees individually.

Mutual funds that impose a load that exceeds 3% or increased an existing load above 3% are excluded.

Expenses

Funds with significantly higher expense ratios than the average for their category are not included in this Guide. We have bolded the expense ratio of funds whose ratios are in the lower 25% of their category.

Performance

Funds that significantly underperformed the average performance of their category are not included in this Guide.

Interest and Availability

Only those funds that are of general interest to mutual fund investors and available for investment by individual investors directly from the fund, without restrictions, are included in this Guide. Funds sold exclusively through advisers are excluded. If a fund family offers multiple no-load classes of its funds, the investor or retail class is presented in this Guide.

Funds Not Included

AAII members who would like performance figures for no-load and low-load mutual funds that do not appear in the print edition of this Guide can access this information on our website at www.aaii.com/guides/mfguide, where close to 1,600 funds are covered.

A Key to Terms and Statistics

Most of the information shown in the listing is provided by Morningstar Inc., but some may come from mutual fund reports (the prospectus and annual and quarterly reports) and solicitation of information directly from the fund. Any data source has the potential for error, however, and before investing in any mutual fund, you should read the prospectus and the annual report.

When a dash appears in the performance tables or in a mutual fund listing, it indicates that the number was not available or does not apply in that particular instance. For example, the 10-year annual return figure would not be available for funds that have been operating for less than 10 years. We do not compile the bull and bear ratings for mutual funds not operating during the entire bull or bear market period. All numbers are truncated rather than rounded when necessary, unless noted otherwise in the following descriptions.

In the fund list, return and difference from category numbers that are in the top 25% of all funds within the investment category are shown in boldface. When risk and expense ratios are in the lowest 25% for the category, these numbers are also bolded. Fund data in the state-specific municipal bond category are not bolded because meaningful comparisons cannot be made across various state categories.

The following provides an explanation of the terms we have used in the performance tables and mutual fund listings. The explanations are listed in the order in which the data and information appear in the listing.

Index Fund: The letter I before a fund’s name indicates that the fund is designed to follow an index, such as the S&P 500; the amounts invested in each security are proportional to the issue’s representation in the index that the fund tracks. Because index funds are not actively managed, they make no research efforts to select particular stocks or bonds, nor do they make timing decisions. They are always 100% invested. This passive management approach means that the expenses and the cost of managing an index fund are extremely low. The online guide reports on the index tracked by these funds.

Closed:The letter C before the fund’s name indicates that the fund is not accepting purchases from new investors. Some closed funds may also suspend additional investments from existing shareholders.

Fund Name: The funds are presented alphabetically by fund name within each category.

Ticker: The ticker symbol for each fund is given in parentheses for investors who want to access price quotes or conduct further research. The ticker is four letters and ends with an “X,” indicating that it is a mutual fund. For example, the large-cap Dodge & Cox stock fund ticker is DODGX.

Style—Growth and Value: Indicates fund investment style. G = growth investing focus, V = value investing focus. More on what these classifications mean is available here.

Annual Total Return (%): Return percentages for each of the last five years. Returns that are in the top 25% of all funds within the investment category are shown in boldface.

Bull Market Return (%)—Fund and Category +/-: Reflects the fund’s performance in the most recent bull market, starting March 1, 2009, and continuing through May 31, 2015; and the difference in fund total return for the period from the average return for the period for all funds in the same category. Return and difference from category numbers that are in the top 25% of all funds within the investment category are shown in boldface.

Bear Market Return (%)—Fund and Category +/-: Reflects the fund’s performance in the most recent bear market, from November 1, 2007, through February 28, 2009; and the difference in fund total return for the period from the average return for the period for all funds in the same category. Return and difference from category numbers that are in the top 25% of all funds in the investment category are shown in boldface.

3-Year Return (%)—Fund and Category +/-: Assuming an investment on January 1, 2013, the annual total compound return if held through December 31, 2015; and the difference in fund annual return for the period from the average return for the period for all funds in the same category. When the difference from category is negative, the fund underperformed the average fund in its investment category for the period by the percent indicated. Return and difference from category numbers that are in the top 25% of all funds in the investment category are shown in bold.

5-Year Return (%)—Fund and Category +/-: Assuming an investment on January 1, 2011, the annual total compound return if held through December 31, 2015; and the difference in fund annual return for the period from the average return for the period for all funds in the same category. Return and difference from category numbers that are in the top 25% of all funds in the investment category are shown in bold.

10-Year Return (%)—Fund and Category +/-: Assuming an investment on January 1, 2006, the annual total compound return if held through December 31, 2015; and the difference in fund annual return for the period from the average return for the period for all funds in the same category. Return and difference from category numbers that are in the top 25% of all funds in the investment category are shown in bold.

Yield (%): The per share annual income distribution made by the fund divided by the sum of the year-ending net asset value plus any capital gains distributions made during the year. This ratio is similar to a dividend yield and would be higher for income-oriented funds and lower for growth-oriented funds. The figure only reflects income; it is not a total return number. For some funds, the yield may be distorted if the fund reports short-term capital gains as income.

Tax-Cost Ratio (%): Measures how much a fund’s annualized return is reduced by the taxes paid on distributions, assuming the maximum marginal tax rate. A tax-cost ratio of 0.0% indicates that the fund did not pay any taxable income or make capital gains distributions. A 3.0% tax-cost ratio means that each year, investors lost an average of 3.0% of their assets to taxes. The lower the ratio, the more tax-efficient the fund. The ratio is calculated using the last five years of data.

Risk Index—Category and Total: The Category Risk Index is the standard deviation of a fund’s return divided by the standard deviation of return for the average fund in the category. The Total Risk Index is the standard deviation of a fund’s return divided by the average standard deviation of return for all funds. Standard deviation is a measure of return volatility and is computed using monthly returns for the last three years. A value of 1.00 denotes average risk. Values above 1.00 indicate greater risk than average while values below 1.00 indicate less risk than average. Risk numbers that are in the lowest 25% of all funds within the investment category are shown in boldface.

Total Assets ($ Mil): Aggregate fund value for all share classes in millions of dollars at the end of the calendar year.

Portfolio (%)—Stock/Bond/Other/Cash: The portfolio composition columns classify investments by type and give the percentage of the total portfolio invested in each. Some funds are “funds of funds” and their portfolio holdings may be denoted by “100% other.” Due to rounding of the percentages and the practice of leverage (borrowing) to buy securities, the portfolio total percentage may not equal 100%.

Percent of Portfolio in Foreign Issues: The percentage of the fund’s assets invested in foreign stocks and bonds.

Portfolio Turnover Ratio (%): A measure of the trading activity of the fund, computed by dividing the lesser of purchases or sales for the year by the monthly average value of the securities owned by the fund during the year. Securities with maturities of less than one year are excluded from the calculation. The result is expressed as a percentage, with 100% implying a complete turnover within one year.

Number of Holdings: The total number of individual securities held by the fund. These can include stocks, bonds, currencies, futures contracts and option contracts. This figure is meant to be a measure of portfolio risk: The lower the number, the more concentrated the fund is in a few issues.

Percent of Portfolio in Top 10 Holdings: Investments, expressed as a percentage of the total portfolio assets, in the fund’s top 10 portfolio holdings. The higher the percentage, the more concentrated the fund is in a few companies or issues, and the more the fund is susceptible to market fluctuations in these few holdings. Used in combination with the number of holdings figure, the percent of portfolio in top 10 holdings figure can indicate how concentrated a fund is.

Expense Ratio (%): The sum of administrative fees plus adviser management fees and 12b-1 fees divided by the average net asset value of the fund, stated as a percentage. Brokerage costs incurred by the fund are not included in the expense ratio, but are instead reflected directly in net asset value. Front-end loads, back-end loads, redemption fees and account activity charges are not included in this ratio. Some funds are “funds of funds” and their expense ratios will not reflect the expenses of all funds held by the fund. Expense ratios that are in the lowest 25% of all funds within the investment category are shown in boldface.

Max Load (%): Percentage maximum fee. The letter indicates the load type: F = a front-end load (a sales charge incurred upon purchase), and R = a redemption fee that is incurred at the time of sale. A — = no loads or charges. Returns are not adjusted for loads, redemption fees or charges.

12b-1 Fee (%): If a fund has the ability to charge a 12b-1 fee, the percentage actually charged is given. A — = no 12b-1 fee can be charged.

R-Squared (%): How much of the fund’s three-year return can be explained by movements in the S&P 500 index. Values at or close to 100% imply the fund’s returns have been directly influenced by the domestic large-cap stock index. Lower values suggest the fund’s returns are less influenced by the movement of the S&P 500, with 0% implying no influence. (R-squared is included only in the Expanded Fund Listings Spreadsheet.)

The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.