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Mutual Funds (Part 2)
- Charles Lin
- Aug 14, 2021
- 2 min read
Updated: Nov 28, 2022
Management
Mutual funds are managed by fund managers. They handle the buying and selling of securities, so you don’t have to do anything. They do all the tough work for you. With this is mind, there are two general forms of mutual funds:
Actively managed funds are closely monitored by the fund manager. They constantly watch the performance of the securities in the fund, and buy and sell when the time is right.
The advantage of actively managed funds is that there is more flexibility in buying and selling. In an economic decline, the fund manager can protect against heavy losses by selling and buying where needed. However, a large disadvantage is that these funds are much more expensive, since the fund manager and all the analysts have to be paid. This leads to a larger expense ratio, and investors get less of the returns.
Passively managed funds, also known as index funds, are not closely monitored. They mostly
just follow the current market. An advantage is that they are much cheaper than actively managed funds, since less people have to be paid. However, a disadvantage is that there can be heavy losses in a down market, since people aren’t actively monitoring prices of the stocks in the fund.
Generally, passively managed funds perform better than actively managed funds. It is hard for actively managed funds to consistently outperform the market, which is when the fund has better returns than the entire stock market, since they have to guess when the market will go up and down so they can buy when the prices are low and sell when they are high. This is possible to do a few times, but it's very hard to do consistently, and will often result in losses.
Passively managed funds follow the market, so when the stock market does well, these funds do well too. Generally, actively managed funds aren’t able to keep up with the overall market.
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