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Colin OShea

August 08 , 2017

Investment Basics: The Mutual Fund Dilemma


When it comes to deciding between an actively managed mutual fund and an index fund, there’s no right or wrong choice. As with any investment, the fund type you choose typically will depend on your risk tolerance, targeted allocation, and the role you expect the fund to play in your portfolio. Reviewing your objectives can help you make a decision.

In the Active Camp

If your long-term objective is to outperform the markets, actively managed funds may be for you. An active fund manager buys and sells investments with the goal of generating returns that beat a comparable benchmark index. Keep in mind that actively managed funds generally have higher trading costs than index funds, a factor to consider in assessing performance relative to a benchmark. These funds may be best held in tax-advantaged accounts, since their trading activity can lead to capital gains distributions.

The Passive Approach

Index funds may be the right choice if tracking overall market returns is your objective and you don’t have the time or the interest to research and monitor actively managed funds. Since index funds change investment holdings relatively infrequently, they generally have relatively low expenses and a smaller tax bite.

What To Consider

Before you buy an actively managed fund, evaluate it by vetting its managers.

Long-term performance. Research the manager’s performance in a variety of markets. While there are no guarantees for the future, above-average long-term performance is a sign of the manager’s skill and success.

Strategy. The manager should have a clear and well-defined strategy for buying and selling investments. Check the fund’s prospectus to make sure you understand and agree with the approach.

Team effort. The fund’s prospectus will tell you the names of the portfolio managers and how long they’ve been with a fund. Longer is generally better.

If you have any questions on funds in your portfolio, contact a Security National Bank Wealth Management advisor to learn more.

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