Studies like the 2009 analysis conducted by Morningstar have consistently found that the majority of managed mutual funds fail to outperform simple index funds. In some cases those managed funds performed considerably worse, all while charging fees that were significantly higher than comparable index funds. If you are considering an investment in a managed fund, it is imperative to check its performance against the benchmark index.
Request a copy of the prospectus for each managed mutual fund you want to analyze. The prospectus lists the performance of the fund over a number of different time periods. The document also lists the performance of the relevant indexes, making it easy to compare the results.
Compare the performance of the managed mutual fund and the Standard and Poors 500 index for the most recent time period. The prospectus lists the performance for the last three months, six months and twelve months. Compare how the fund has done compared to the unmanaged index.
Find a time period in which the index went down, and compare the performance of the managed fund during that same time period. If you do choose a managed fund, you want to look for one that has consistently outperformed the index, both in up markets and down ones. Managed mutual funds often try to time the market by changing the percentage of stocks they hold in anticipation of changing market conditions. A fund that was able to sidestep a bear market and go up when the stock market tanked would be worth looking at.
Check the expenses of the fund and compare it to the index. According to the Motley Fool website, some index funds charge as little as 0.18 percent, versus well over one percent for many managed funds. Take these differences in expenses into account when comparing the performance of managed and index funds.
Items you will need
- Mutual fund prospectus
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