A managed fund is a mutual fund that hires a professional manager to deliver outstanding performance. That usually means an equity fund that trades stocks. The manager is compensated with a management fee as part of the fund expense ratio.
In contrast an index fund need not trade stocks. It merely attempts to match the performance of its index, which tends to be steady in composition except for occasional changes. Hence, managed funds attempt to hire top performers and reward them well. Index funds can accept a more average performer or one with skills in other areas. Managed funds also must spend more on research to investigate investment opportunities and make the right choices.
Managed funds tend to churn their holdings to catch the latest trends and hold on the the current market leaders. They have higher trading costs in addition to their higher management costs and research costs.
Pundits note that most managed funds fail to outperform the corresponding index. Those who invest in mutual funds are advised to consider first the index fund and investigate performance history and expense ratio. A managed fund that consitently outperforms the indexes may well be worth its extra cost, but mediocre performance managed funds should not be considered.
Theoretically in bad times when some stocks are doing well and others are out of favor, you would think a managed fund could do much matter than an index fund by selecting only the good stocks and omitting the ones out of favor. But as a practical matter when you look into it, it turns out the managed fund always misses the bottom of the market and the first recovery of the unexpected winner. Top performing managed funds are rare even in a choppy market.
Related Fool Articles
Recent Mentions on Fool.com
- Retirement Planning: Don't Give In to Pessimism
- Why Do High-Yield Stocks Like American Realty Capital Bring Out Bad Executive Behavior?
- Why Is George Soros Buying This Beaten Down Biotech Stock?
- 3 Tips for New 401(k) Mutual Fund Investors
- What Investors Are Overlooking With The Boeing Co.'s Large Dividend Increase
- The Biggest Problem With Social Security Isn't Shrinking Reserves -- It's This