Passive Vs. Active Management
Determine if you want an actively or passively managed mutual fund. Actively managed funds have managers that make decisions regarding which securities and assets to include in the fund. Managers do a great deal of research on assets and consider sectors, company fundamentals, economic trends and macroeconomic factors when making investment decisions. Active funds seek to outperform a benchmark index, depending on the type of fund. Fees are often higher for active funds. Expense ratios can vary from 0.6 to 1.5%.
Passively managed funds seek to track the performance of a benchmark index. The fees are generally lower than they are for actively managed funds, with some expense ratios as low as 0.15%. Passive funds do not trade their assets very often, unless the composition of the benchmark index changes. This results in lower costs for the fund. Passively managed funds may also have thousands of holdings, resulting in a very well-diversified fund. Since passively managed funds do not trade as much as active funds, they are not creating as much taxable income. This can be important for tax considerations.
From 2004 to 2014, only 24% of active managers beat the returns of the overall market. This lack of performance can be attributable to the higher fees that active funds charge. It may also reflect the state of the economy since the 2008 financial crisis.
There are some mutual funds that do outperform the market. However, these funds are dependent on their star managers. If the manager leaves the fund, the future performance of the fund is in doubt. For most investors, a passively managed fund may be a better option.
Passive Vs. Active ManagementDetermine if you want an actively or passively managed mutual fund. Actively managed funds have managers that make decisions regarding which securities and assets to include in the fund. Managers do a great deal of research on assets and consider sectors, company fundamentals, economic trends and macroeconomic factors when making investment decisions. Active funds seek to outperform a benchmark index, depending on the type of fund. Fees are often higher for active funds. Expense ratios can vary from 0.6 to 1.5%.Passively managed funds seek to track the performance of a benchmark index. The fees are generally lower than they are for actively managed funds, with some expense ratios as low as 0.15%. Passive funds do not trade their assets very often, unless the composition of the benchmark index changes. This results in lower costs for the fund. Passively managed funds may also have thousands of holdings, resulting in a very well-diversified fund. Since passively managed funds do not trade as much as active funds, they are not creating as much taxable income. This can be important for tax considerations.From 2004 to 2014, only 24% of active managers beat the returns of the overall market. This lack of performance can be attributable to the higher fees that active funds charge. It may also reflect the state of the economy since the 2008 financial crisis.There are some mutual funds that do outperform the market. However, these funds are dependent on their star managers. If the manager leaves the fund, the future performance of the fund is in doubt. For most investors, a passively managed fund may be a better option.
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