Index funds and mutual funds to some extent are synonymous. Index funds are a mutual fund that mimics an index. I believe your question revolves around what type of mutual fund will give you the best performance, actively managed or passive (like an index mutual fund). That is indeed the million dollar question, without a totally clear answer. Take a look at any list of the "best mutual funds to own" from one to five years ago, and then compare it to a similar current list. Most likely none of the funds are the same. There are many stories of a rock-star mutual fund manager who out performs his peer group year after year, all of a sudden going cold and under performing.
The best mutual fund investment for you, is one that aligns with your investment goals, your tolerance for risk, and your overall situation. If anybody asked me how to choose, and said just to pick one factor, I would say 'Just buy low fees'. Fees impact performance, and if you can find a fund that aligns with your needs and doesn't cost a lot, you're moving in the right direction.
Aside from finding a mutual fund with low fees, a few other investing axioms are:
- Stay invested - If you invested $1,000 in the S&P 500 index from 1970 - 2015, it would have grown to almost $90,000 over those 45 years. If you pulled the investment out of the market and missed the 1 day with the best market performance, you'd have $10,000 less. If you missed the the best 25 days over the same 45 years, you'd wind up with only $21,000.
- Be concerned about the allocation and not so much the individual fund(s) - If, for example, your investment stratgy winds up being 80% stocks and 20% bonds, the types of stock funds you choose to make up the 80% are less important over the long term than maintaining the 80% in stocks. Picking the perfect fund is not ever going to happen, so pick a number of funds that support your needs, make sure they have less than average expense ratios, and don't worry about which are on the hot list of a financial magazine. It's the allocation of your assets that drives the return in the long-term, not the individual investments.
- Use of objective criteria like Morningstar star ratings (?) - Even though this is supposedly an objective source of data to help evaluate mutual funds, several studies have shown that the Mstar ratings are not always a reliable predictor of fund performance. In fact, one study showed that selecting the funds in a particular category by their expense ratios was a better predictor of success than star ratings.
So that takes us back to focusing on expenses, which kind of answers your initial question. If you want more profit, reduce your expenses.
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