MUTUAL FUNDS » Best Mutual Funds

Mutual funds are usually constructed to either be an index fund or to be an active management fund. There are pros and cons to each.

Index funds are those mutual funds or exchange traded funds that are established to mimic the behaviors of a specific financial market. Many of these types of funds are developed subsequently managed by statistically generated computer programs. There is very little human involvement in the planning and development of these investment options. These funds utilize the passive management style, as it is not its goal to outperform the benchmark index but to generate an average rate of return.

Collective investment schemes that feature active management have the human touch. It is the personal goal of the fund managers to help the investment turn into profit by beating the investment benchmark index. With the goal to out perform, these funds are managed opposing from index funds. The results of these funds rely heavily on the skill, knowledge, and ability of the fund manager, as well as their research staff.

Active management funds tend to have extra fees associated with them because of the additional manpower involved. However, according to Standard & Poor's, investors may not be getting their money's worth from paying the additional fees required of active management accounts.

According to the Standard & Poor's report released in November 2008, in the five-year period ending June 30, "S & P 500 outperformed 68.6% of actively managed large cap funds." In general all their statistics proved that just because an account had active management, didn't mean it was any better than an account with passive management.

However, there are circumstances where active management accounts outperformed their passively managed index fund counterparts. With the economy in such a current state of flux, it is very hard to predict which is the better path to follow. Just keep reading what you can to educate yourself and keep your fingers crossed.

Not all mutual funds are represented through brokers and sold directly to investors. There are also exchange-traded mutual funds that are traded on stock exchanges, very similar to stocks in general.

Exchange traded mutual funds are legally classified as either open-end funds or as Unit Investment Trusts. Exchange traded mutual funds are similar to their other open-end counterparts in the sense that they both assets composed of stocks and bonds. They are becoming more favored by investment professionals because of their reduced costs, tax efficiency, and stock-like features.

However, exchange traded mutual funds differ from other mutual funds because only "authorized participants" such as large institutional investors are able to purchase and redeem shares directly from the exchanged traded mutual fund manager. Individual investors can then trade them on the stock market with more traditional mutual funds. Investors work directly with the funds' money managers to purchase or redeem shares. With exchange traded mutual funds, the authorized participants act as the funds' money manager.

Exchange traded mutual funds also differ from open-end funds and UIT as they are not usually purchased with cash, they are purchased with a mix of other securities of equal value. After the large institutional investors conduct the purchased transactions of the "creation unit," the shares can be split up and sold on the secondary market such as the stock exchange as an exchange traded mutual fund. Investors who would like to sell their exchange traded mutual funds can do so either through the secondary market or by selling them back to the originator of the creation unit.

Like all other mutual funds, exchange traded mutual funds must come with a prospectus with full disclosure per the Securities Exchange Commission regulations. It is important for investors to review all the material for their exchange traded mutual funds so they are clear of their expectations and terms of the investment.

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