Mutual fund or Index Fund

[scuba5794]

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Which one would you suggest? An S&P index fund returns around 10% while owning a mutual fund increases the risk, so why do people invest in mutual funds instead of low expense ratio index funds? I don't understand it since most people seem disappointed in mutual funds.

 

[etf]

Which one would you suggest? An S&P index fund returns around 10% while owning a mutual fund increases the risk, so why do people invest in mutual funds instead of low expense ratio index funds? I don't understand it since most people seem disappointed in mutual funds.

some actively managed funds perform better than their benchmark indexes.

 

[scuba5794]

some actively managed funds perform better than their benchmark indexes.

this is true some do but around 70% do not and you have to also keep in mind do they perform better than the benchmark after all of their expenses? If it is Peter Lynch type returns i would obviously say actively managed is better but he returned a much higher yield. Trying to squeeze out a couple of extra points isn't worth the risk IMHO.

 

[Ulquiorra]

A few funds do perform the market, but very very few can outperform the market consistently.

 

[johnstoner]

with that said, I can't see as many benefits of mutual funds versus an index fund. esp if you do ETF trading, the costs are lower.

 

[scuba5794]

well there are benefits to mutual funds provided you choose the right fund, which really means you choose the right fund manager because a mutual fund is only as good as its manager

 

[etf]

this is true some do but around 70% do not and you have to also keep in mind do they perform better than the benchmark after all of their expenses? If it is Peter Lynch type returns i would obviously say actively managed is better but he returned a much higher yield. Trying to squeeze out a couple of extra points isn't worth the risk IMHO.

actually, i heard closer to 80% of actively managed funds underperform their benchmarks. however, there are thousands of mutual funds out there, so that 20% isn't 3 or 4 funds, it's more like hundreds. I personally use actively managed funds to invest in things that I have no clue about, like international small cap, or things i couldn't really (efficiently) invest in myself, like emerging markets fixed income. but for the beginner, and actually for most people who aren't willing/ don't have the time to put in the work, an index fund works out good.

 

[The White Coat Investor]

# 1 Index funds are mutual funds.

# 2 An S&P 500 index fund DOES NOT return around 10%. In the PAST it has returned around 10%. This is VERY DIFFERENT FROM "returning around 10%." This isn't a bank savings account depositing 10% into your account every year.

Index funds are mutual funds that track the market they are designed to track, such as the US Stock Market, the Japanese stock market, Value Stocks, Real estate stocks etc.

The reason index funds beat 55-95% of their actively managed peers over the long run is cost. For example, if an actively managed fund costs an expense ratio of 1.0 and an index fund costs an expense ratio of 0.2, then the actively managed fund not only has to beat the index (hard in and of itself) but it has to beat it by 0.8%, which is even harder. They also have to overcome the cost of high turnover, which affects not only bid-ask spreads but also tax-efficiency. Every year, some of the funds do it, but as the years go by, fewer and fewer stay ahead of the index.

The tricky thing is to pick a fund that will beat the index over a long period of time a priori. That is nearly impossible. But if you wish to try, do NOT look at the past performance of the fund. Look at the COST (and the turnover which affects not only the cost, but also the tax-efficiency) of the fund. The lower the hurdle that the manager has to "clear," the better chance he has of doing it.

ETF suggests that index funds are for "beginners." Let me refer you to a forum where a high percentage of the investors are millionaires who got that way mainly by investing in index funds. Index funds may be "simple," but they are also sophisticated.

http://diehards.org/

 

[Bobblehead]

One additional consideration is the tax efficiency of your funds. Active funds in general are less tax efficient than passive index funds in that they generate more of their earnings from dividends and short-term capital gains which will be taxed at a higher rate than long-term capital gains.

In addition to the Diehards website there are a couple of other good places which demonstrate how passive index investing can pay off handsomely over the long run with a lot less grief. A lot of active investment is knowing and understanding your risk tolerance which you won't have any real idea about until you've ridden at least one market correction all the way from the very top to the bottom.

Here's an interesting way of putting the 80% figure of active funds underperforming the market into perspective. It's a very simplistic overview at the Coffeehouse Investor here.

 

[scuba5794]

With an expense ratio disadvantage right from the start active mutual funds are put at a huge disadvantage. I am not saying that an index WILL return 10% I am just going off of past information over the last 80 years. I am aware that it is not like a bank but i am talking about my retirement fund when I speak about investing in one of these, not my savings money. Even in my retirement i still keep around a 50/50 split between a CD and an Index fund. A safer approach although at my age i should be investing more in the market.

 

[bbaker]

OK, so I've owned mutual funds, stock, bonds, etc. but never an ETF stock. I was considering buying FSMIKX (Fidelity Spartan 500 Index Fund). The expense ratio is around 0.55. Do you think it would be a better play to buy this fund or go with an ETF index fund? If ETF, which fund?

Does an ETF fund have expense ratio or do they trade just like stocks?

Also, curious, does it make anyone nervous with the market hitting record highs? Especially, if I'm considering putting money into an index fund.

Thoughts are appreciated.

 

[jefguth]

OK, so I've owned mutual funds, stock, bonds, etc. but never an ETF stock. I was considering buying FSMIKX (Fidelity Spartan 500 Index Fund). The expense ratio is around 0.55. Do you think it would be a better play to buy this fund or go with an ETF index fund? If ETF, which fund?

Does an ETF fund have expense ratio or do they trade just like stocks?

ETF's do have management expense ratios, like mutual funds you still have to pay for the management of your shares, but since ETF's are generally very passive there is little trading activity which means lower fees. Low MER mutual funds do exist (Vanguard, etc) that basically mimic index ETF's, but they trade like mutual funds.

Read this for some insight on whether to go mutual fund or ETF:
http://www.mymoneyblog.com/archives...ating-index-etf-vs-mutual-fund-purchases.html

 

[Taurus]

Vanguard index funds are the way to go.

Choose an S&P500, a bond, and international funds.