Active vs Passive Mutual Funds
Active vs passive mutual funds is an important concept to understand and is a common mutual fund FAQ. Active mutual funds are what most people just call mutual funds. They are run by fund managers and analysts who attempt to beat the market by picking and choosing which investments to invest in. An example would be the Fidelity Magellan Fund.
Passive mutual funds are often called index funds. These funds try to mimic a certain index by investing in exactly the same securities and in the same proportion. It is called passive because no one is making decisions on what or what not to invest in. They simply try to mimic a certain stock or bond index. An example would be a S&P; 500 stock index fund which would simply buy all the companies in the S&P; 500.
A passive mutual fund has two advantages over a active mutual funds. One being that a passive fund is much cheaper to run which usually equates to lower expenses that you have to pay. A passive fund is not actively managed by tons of analysts with big salaries. They also tend to be more tax efficient.
The second advantage is that passive funds, on average, perform better than active funds. Of course history does not always repeat itself, but your odds of beating the market usually go up when investing in a passive fund.
On the other hand, an active mutual fund will have the advantages of expert analysis since it is actively run by an experience fund manager.
An active fund will also give you the chance of higher returns. A passive fund mimics an index so your return will be similar to that of the index. An active fund is aiming to beat the market by making investment decisions based on the health of the market. If a fund manager feels the market is set for a downturn he can invest accordingly. If he feels that one sector will perform better than another he can move funds accordingly.
When deciding between active vs passive mutual funds it all comes down to what you are trying to achieve. If you can afford a little more risk in attempt to beat the market than you can choose an active fund. If you are looking for lower fees and a more tax efficient investment than you can choose a passive fund.
It is worth noting that around 80% of mutual funds fail to beat the market each year.
Best No Load Mutual Funds
What are the best no load mutual funds? First let's discuss what a no load fund is. No load mutual funds are simply funds that that have charge no fee to buy them. Most front load mutual funds will have a fee when you purchase them. For example, most Funds mutual funds have a 5.25% front end load.
No load mutual funds do not have this fee, therefore more of your dollars go into your investment. In the long run this can turn into a substantial amount.
These recommendations are simply based on past performance. Of course, past performance is no guarantee of future performance. These are also based on three and five year averages. One year averages were not used because no load mutual funds that have great one year averages come and go.
Definition of Mutual Funds
The definition of mutual funds: An open ended fund that is operated by an investment company. This company raises money from shareholders and then invests in various investment vehicles. Mutual funds raise money by selling shares of the fund to public investors (like yourself). A mutual fund will take the money they received and invest it in stocks, bonds and/or money market instruments.
OK, that mutual fund definition may have left you more confused then when you started. Here is a simpler definition. A mutual fund takes money from a large groups of individual investors, pools it together and then buys investments. Everyone who invested money then shares in any profits or losses of the fund in proportionate to the amount they invested and when they invested.
You may have noticed that in the first definition of mutual funds it stated "a open ended fund." This simply means that there is no limit to the number of shares that can be issued. Current or new investors can invest as much money as they want and the fund will simply issue new shares to them.
Conversely, a “closed ended” fund is similar to stock. Closed ended mutual funds issues a predetermined amount of shares in a initial public offering (IPO). After the IPO the shares then trade on a stock exchange. Closed ended funds are do not have to issue more shares like a open ended fund does.
Why do people invest in mutual funds? Mutual funds give investors the benefits of professional money management, diversification, convenience, liquidity and choice. This is what makes mutual funds so popular and attractive. These features are very hard to achieve by investing on your own.
It is reported that around 90% of all investors own mutual funds in their portfolio. If you invest in a 401(k) at your job, it is very likely that you are investing in mutual funds. All in all, mutual funds are where most beginners as well as advanced investors should invest most of their money. They are fairly easy to understand and take most of the guess work out of investing, much as managed funds where traders trade for you.