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which is better – actively managed mutual funds or passively managed index funds ?
actively managed mutual funds have a team of researchers , a fund manager and tons of expenses in the form of office space – rentals , utilities and such. they also have an entry and / or exit charge ( which you pay while buying or selling those funds ) , a management fee of 1 – 2 % per year ( or more ) . All of these eat into the returns . 1 – 2% may not look like much , but if the amount that you have accumulated at the end of 40 years is 20,000,000 ( INR 2 crore ) , that fees will amount to a lot ..
Passively managed index funds , on the other hand , have no management fees , no high cost fund managers and researchers and all the office space cost is also saved . As a result , there is a very less cost to investing in them and at the end of 40 years , you will not be paying much in terms of management fees .
Actively managed funds tend to boast a lot about beating the market returns .. but in reality , the market is very efficient and over a period of 30 – 40 years , very few can consistently outperform the market
Passive index funds , just imitate the main index and move up or down with it. Over a period of 40 years or so , the market index has almost always gone up . You just have to ride out the storms ( falls in the indexes ) and hold on tight .. just think of the falls as discounts ( and who does not love discounts ? ) and just buy more .