Managed Mutual Funds Vs. Index Funds
A diversified portfolio includes a mix of stocks, bonds, money market or mutual funds. Diversifying a portfolio minimizes the risks of investing.
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Portfolio mix
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The portfolio mix is determined by when the investor plans to make withdrawals on the investment, the risk tolerance of the investor, the investor's investment goals, and the investor's financial means and investment knowledge.
Managed mutual funds
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Managed mutual funds are mutual funds that are actively managed. This means that the fund manager allocates and reallocates the investments in the portfolio to optimize return.
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Index funds
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Index funds are mutual funds with portfolios that are constructed to match the return of a market index such as the Standard & Poor's 500 or Dow Jones Industrial Average. Index funds require very little to none of the fund manager's intervention. This makes them passively managed.
Return
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Return, also referred to as "total return," is often confused with yield. Return is the actual amount an investor earned on an investment for a specific time period in the past. A return calculation takes the interest, dividends and capital gains into consideration. Yield is more forward-looking. It measures what the performance of the investments will be at a future date. A yield calculation takes the interest and dividends into consideration, but not the capital gains.
Fun Fact
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According to Investopedia.com, there are a number of actively managed mutual funds that fail to have a higher return on investment than an index fund.
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References
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- Photo Credit Image by Flickr.com, courtesy of Duncan Rawlinson
