There are basically two types of funds. The first type is called the “active” managed fund and the second type of fund is called the passive or the “index” fund.
Below tips from Agriculture Mortgages UK will help you to understand why are Index Funds better than Actively Managed Funds-
Cost Consideration
Aside from the facts showing that index funds have consistently outperformed actively managed funds, we can also look at the cost consideration. Already, actively managed funds have a disadvantage. The average management expense of active managed funds costs 1% more than the index funds. This can also be one of the reasons why active funds underperform as compared to their index.
Tax Considerations
Aside from the cost, another issue that is not reflected in the fund return numbers is that the portfolio manager of an actively managed fund who is looking for extra returns, may buy and sell investments more frequently than an index fund. This process of buying and selling, also known as turnover, can result in heavy capital gains which are taxable to the fund shareholders, providing that the funds are owned in a non-retirement account.
Based on the information above, it seems that index funds are consistently better than active managed funds. But are investors beginning to realize this?
The Shift To Index Funds
2008 marked one of the worst recessions that the world has seen ever since the Great Depression. The volatility of the stock market prompted many investors to sell their actively managed stock funds. During that year, investors withdrew more than £214 billion from their actively managed stock funds, whereas index funds saw inflows of more than £47 billion. The same trend continued in 2009 as investors went on to withdraw £37 billion of actively managed stocks funds while putting in £36 billion in stock index funds.
This time, it seems investors have come to realize the historical performance of index funds. Plus, index funds have always been cheaper than actively managed funds. The shift to indexing may also be attributed to a decade of lackluster returns from actively managed funds. Whatever the reason may be, the conclusion still remains that index funds, despite their reputation for being “mediocre”, are still the better performers. And the good news is, many investors are realizing that their money might just do better, and pay less in fees, when they place it in a passive index fund.
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