In the previous blog, it was stated that both mutual funds and ETFs can help investors to diversify their risks. Their main difference is that mutual funds utilise active management method, while the other one uses passive management. Active management indicates that investors proactively try out different methods to beat the market, it is usually adopted by professional fund managers. They would do research beforehand, analyse forecasts to deduce the market trend and decide the suitable strategy to invest in stocks. As there might be lots of preparation work required, the fee of mutual fund purchases is undoubtedly high. Passive management conveys that people invest according to the market movements. Their main aim is to match the general performance, without having to win the market. Steps being simpler, investors would usually track a certain index in order to follow the performance. A common example would be S&P 500, where it covers all the stocks that are included in this index. These easy-to-manage steps are the main reason that drives down the costs. Because of the fee structure, investors have been preferring index funds over active-management-funds. However, there is never a best strategy, so keep in mind these few points:
- Difficult to beat the market
- Downside protection
One of the benefits of active-management-funds is that skillful and highly experienced professionals can excel their knowledge in terms of managing our assets. During times when the market dips, they can still try to protect our financial products.
- Diversify your investments
Always bear in mind that “don’t put all your eggs in one basket”. Allocate your holdings to different products, you may also purchase a few funds in one go.
According to a research, within the period of 5 years, there is 91% of funds that are unable to beat the S&P 500 i.e. the market. As such, the low cost index funds could in turn be a more feasible option.