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Best 401(k) Mutual Funds for 2012

Here are two picks for each of five distinct investment classes

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Best Blue-Chip Stock Funds

Vanguard mutual funds 401(k)Winner: Vanguard Dividend Growth

Vanguard is the leader in low-cost mutual funds, even when you buy a fund with an active manager. Vanguard Dividend Growth Fund (MUTF:VDIGX) has a rock-bottom expense rate of 0.34% — yet continues to outperform its benchmark, the Vanguard Dividend Appreciation Index. This is a good example of a well-run fund that consistently beats “passively managed” investments of a similar strategy.

Most important, that strategy is a good one for a volatile market. Dividend Growth is designed to provide investors with income by picking high-yield stocks across all industries. Current top holdings include Automatic Data Processing (NYSE:ADP) and PepsiCo (NYSE:PEP), which both yield 3%-plus dividends. That means even if the stock flatlines, you’ll get a 3% return on your investment via cash payments every quarter — a perfect way to find profits in a market that may go nowhere for some time.

The fund gets Morningstar’s top five-star rating. Minimum buy-in is $3,000.

Runner Up: Wells Fargo Advantage Growth

A good second choice for IRA accounts or investors with more options is the Wells Fargo Advantage Growth Fund (MUTF:SGROX). This also is an active fund that relies on managers making picks. It’s pricey, with a 1.3% expense ratio, but returns are worth it. The Wells Fargo Advantage Growth fund has tallied double-digit returns in 2011, more than twice the broader market, and over the past five years $10,000 would have grown into $15,000 — while the S&P is largely flat. Past performance is no guarantee of future returns, but these guys have done well picking stocks. This fund also gets Morningstar’s top five-star rating.

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