Passive vs. Active Managed Funds
There are two types of funds you may be looking to invest in: actively managed and passively managed. First, a fund is an investment tool that takes your investment capital and divides it between selected stocks and bonds, all bundled within one fund. While the two can invest your money in the same bundle, there are key differences.
Actively managed funds are those with a portfolio manager who handpicks what the fund is invested in. The objective of the portfolio manager is to pick investments that will outperform the stock market, through research on companies, trends, and macroeconomic data. One important thing to note is that actively managed funds tend to have higher expense fees to pay for this management. For example, if the fund performs an 8% return, and the expense fee is 1%, that is equivalent to you receiving a 7% return overall. On average, the typical expense fee is around 0.80%. With an actively managed fund, you can expect higher fees with the hope of higher investment returns.
Passively managed funds are those without a portfolio manager actively investing. Instead, it simply follows a market index, such as the S&P 500. It is nearly impossible to mimic an index exactly, so there may be a slight variation, but this is the overall objective. Passively managed funds will also have a lower expense fee, typically around 0.2%, as they are not paying for a manager’s expertise and research. Hence the same 8% return with a 0.2% expense fee would still yield a 7.8% return. With a passively managed fund, you can expect much lower fees and more predictable returns that mirror the overall stock market.
Although contrasting the two, there is not a right and wrong type of managed fund to invest in, as it is a personal choice, and each year tells a different market story. For someone who is looking to be extra risky and hopes for a possible home run, maybe the actively managed fund would be the right choice. For someone who is looking for more consistent, predictable returns and is happy with hitting the double, the passively managed fund would be the better choice. Overall, investing in either type of fund over the long-term will give you positive returns on average.
As always, please reach out to your advisor if you have any questions about your personalized Investment Plan.
Hyland Financial Planning