Are all mutual fund companies equal? How do you determine if they are actively or passively managed? Which is better, active or passive?
No, all mutual fund companies are not equal - there can be a wide range of differences among them, including fund managers and management styles, investment options available to invest in, how much money you need to invest with certain investment options, and the fees or expense ratios charged by each investment option. Some insight into mutual fund companies can be tied to a fund’s rating, but it’s more important to choose funds that fit with your goals, timeline and risk tolerance.
Many mutual funds are actively managed, that is, run by fund managers and analysts who choose an investment mix in line with the fund’s objectives but relying on investing skill to beat the market or index that broadly describes the investment strategy. Other mutual funds do not attempt to beat the market and are known as passive or index mutual funds. Such passive/index funds invest in the same or similar securities that make up an index. They are considered passively managed since an analyst is not needed to choose investments – securities change only when the index changes. Therefore, management costs are generally lower than active funds.
Although vigorously debated, neither active nor passive/index funds are are necessarily or universally better than the other – the best type of fund and management style is the one that fits with your investing philosophy and goals for the future. However, be sure to pay attention to the net of fees performance experience of the fund relative to its stated index and all fees charged by the fund. Passively managed funds generally have lower fees than actively managed funds which can make matching the index a lower hurdle to meet.
Understanding Mutual Funds at ctainvest.org can help you learn more.
Important Note: CTA does not give tax, legal or investment advice. You should meet with your tax, legal, and/or investment advisor to determine the best fit for your situation.