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Q&A: managed vs indexed funds

Q. There’s a lot of debate about the performance of fund managers versus passive funds or index funds and I am not sure if I understand the issue. I don’t know much about shares but I keep reading that this could be a buying opportunity and so I wanted to invest in an investment fund. I have super but I am in my 30s and want to grow my money to buy a some land in the country eventually. Could you give me your views.
 
Brett, Cammeray, NSW
 
A. Tests have been done that show index funds have a good record against the average fund manager. A fund manager actively trades stocks and other assets to get a result per quarter and per annum. The index fund can buy the 300 shares that make up most of the All Ords Index and so if the index rises by 10%, the index fund should rise by a very similar amount minus the costs. Because there’s less work to do with these passive funds, their fees are quite a bit less and this makes them more appealing.
 
Critics who don’t like the general belief that index funds outperform active funds ask: “Who wants to work with an average fund manager?” Very good fund managers can outperform the index, but they can have a run of outs where the fund beats them. Some funds will have gearing and therefore they are more risky, but provided the market is heading up, they can produce results such as 50% when the market rises by 25%. That’s the benefit of gearing, but these work in reverse too and should be treated with care.
 
I like the cost and return of index funds, especially when the market is low with plenty of room to go higher. After a few good years they can lose heavily when the market slides. Some careful smarties might split their investible lump sum, putting half in a top performing active fund manager and the other half in an index fund, which is not a bad idea for those who don’t want to study shares and individual companies. However, look out for the fees!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 
 

Published on: Wednesday, July 29, 2009

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