Index Funds and Active Management

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.