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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 Small Stock Funds

Fidelity mutual funds 401(k)Winner: Fidelity Small Cap Discovery

If you think stock picking is important with midsize companies, it’s even more important with up-and-coming outfits that barely are out of the start-up phase. These smaller companies have virtually limitless potential, but also are more likely to suffer in market shocks or fail completely on missteps.

While previous profits are no promise of gains in 2012, it’s worth noting the very strong performance of Fidelity Small Cap Discovery Fund (MUTF:FSCRX) since its current manager Chuck Meyers took over in early 2006. The fund’s five-year annual return is over 6.5% — and more impressively, since the 2009 market lows, the Small Cap Discovery fund has more than doubled its investors’ money with a nearly 120% return! The broader market is up almost 50%, and small-cap indices like the Russell 2000 are up by over 60%, but that doesn’t hold a candle to this Fidelity pick.

The fund gets Morningstar’s highest five-star rating, and its modest 1.08% expense ratio is one of the best among actively managed small-cap funds. With a long-tenured manager with a history of beating his benchmark, this mutual fund is worth a look.

Runner Up: Intrepid Small Cap

The Intrepid Small Cap Fund (MUTF:ICMAX) bests even the strong performance of Fidelity Small Cap Discovery when you go back five or 10 years. But it has a slightly higher expense ratio of 1.51%, and its current managers have been with the company for only a few years — the oldest dating back to just 2009. So, they can’t take all the credit for the Intrepid fund’s long-term success. On the other hand, the fund has outperformed the benchmark Russell 2000 over the past year and the past three years, and it gets Morningstar’s top five-star rating. So there’s reason to believe success will continue under the current team.

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