The Case against Managed Mutual Funds

If you are investing in mutual funds at all, most likely it is in a managed mutual fund. There is a reason for this… all brokerage firms advertise the managed mutual funds more so than index funds because those are the funds that bring them in the most money. All things the same, they are going to try and get you to invest in a managed mutual fund so that they can collect your fees.

There is an interesting debate among investors about whether or not it is better to have a managed mutual fund or an index fund (a fund that simply tries to track the stock market. A managed mutual fund is one that is managed by a person (or maybe a few of them) and tries to maximize the investment based on their thoughts. Meanwhile, an index fund mostly just tries to track the market and match the return of that.

I personally tend to think that index funds are a better investment. There are a few different reasons why I feel this way. First, mutual fund managers might outthink themselves. While certainly some managed mutual funds perform better than index funds, most managed mutual funds do not outperform index funds. The stock market is such an unpredictable thing that to try and outperform it is generally a losing proposition. Unless you are really good, chances are that you will have a very difficult time beating the returns of the stock market over a long period of time.

Next, the fees tend to be higher in managed mutual funds. You will be paying a portion of your money in fees, so the lower the better. With managed mutual funds, the fees might not be too big, but they generally will be higher than index funds. The mutual funds managers need to be paid and make more moves, which is why there are higher fees, while the fees on index funds are a lot lower, which is good for you. Every bit of fee that you pay simply takes away from your return. Even if a mutual fund manager can outperform an index fund by 1%, if there is a 2% fee, then you will still be worse off in the long run. That puts a lot of pressure on a mutual fund manager.

So there are other reasons, but these are the two main reasons I think index funds are better than managed mutual funds. They have lower fees and often have a higher return. With a combo like that, index funds are a very solid investment. While most brokerage firms will do their best to sell you managed mutual funds, in many cases unmanaged will be better for your monetary growth.