Mutual funds are pools of money managed by an investment company. They help investors diversify into a variety of financial segmentations; typically separated by investment styles.
Stock Funds The decision criteria are segmented into multiple areas that can be mixed and matched. For example, there are Domestic-Small-Value fund, or International-Large-Growth fund
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Bond Fund, the main considerations are several: Type of bond (ie. Government or Corporate), Duration (short, mid vs long term bond), Tax status (taxable vs tax-free), Location (Global, Emerging Markets, US) etc
Mutual fund is one of the best investment products created because it provides both cost efficiency and instant diversification. One of the considerations when a person invests in mutual funds is whether to select an index fund or an active managed fund.
An index fund buys a pre-defined basket of stocks based on the investment criteria. Because there is no active fund manager who actively research and trade stock, index fund is cost efficient and a good way to diversify without too much study required. Given 80% of active managers can’t beat the market over the long run, index investment is well suited for investors who want diversification and be content with the average market performance. Of course, there is a downside to index investing. In addition to not being able to outperform the market, an index fund is normally 100% invested. There is no cushion when the market experiences a severe downturn.
An Active Managed Fund is managed by a fund manager who buys and sells financial products (ie. stocks, bonds, option, commodity) on an investor’s behalf. Investors are essentially betting on the fund management team’s ability to navigate market turbulence and outperform the market. Based on Fund Mojo’s study, only 20% of fund managers can somewhat beat the index over some periods of their management history. Furthermore, only 2% of the long-term fund managers can consistently beat their peers and their category average return on a 1-year, 3 years and 5-years basis. (We are talking about fund managers, not funds since funds change managers.) Based on historic return, these fund managers worth every penny of their management fee and is the reason why there are still active managed funds. The key is to identify these managers early, monitor their performance and believe in their capability, and stay with them for the long run. If you wants to know who they are, subscribe to our monthly report.