Does the feeling of getting high returns by investing in a mutual fund makes you happy even if you have to pay the extra fee that the fund charges for delivering alpha returns? Or does the chances of you having to pay lower charges for investing in an index fund, which is less risky and deliver returns in line with the benchmark indices a much preferred option?
Well each one has its own pursuit of generating returns, the pursuit which we will analyze. Most of us as investors, blame the fund managers if they returns were not delivered to them as promised. But there are a lot of factors that are reasons as to why a fund performs poorly.
When a good fund is actively managed, it means that the fund manager is actively buying and selling its stocks; where the transaction costs are involved. This will deduct the value of your returns considerably.
Most fund managers, to get the edge of trading, bet on their benchmarks so as to get higher returns, but sometimes these bets can get awry, making you lose all your money, sometimes even pushing you into a debt for taking a loan to repay your personal loan or other financial liabilities. By opting such an approach the fund manager ignores to utilize the opportunity to fully capture the rise in a particular stock’s value or buy when the stock still has a lot of downside left.
But, passive investment technique, as boring and unexciting as it sounds, could be the solution to the stock picking woes in mutual funds. These passive funds will only hold the stocks that constitute their benchmark index, and in the same proportion as that of the index. There is no market timing and the chances of human error are eliminated.
The debate as to which will be a better investment opportunity has been raging since ages. Each side has its own set of advantages and disadvantages.
For investors who want to invest in the market but not get involved too much into risk and are happy with average-high returns, prefer passive investing. Whereas those investors who like to take the risk and enjoy higher returns than the market, prefer the active investing. Most investors in Mutual Funds look for generating high returns in a limited number of years. The reason because of which this type of investing technique has not caught the eye of the investor.