Should Retail Investors Invest in Index-Tracker Funds Rather Than Actively-Managed Funds?
Should Retail Investors Invest in Index-Tracker Funds Rather Than Actively-Managed Funds?
Should retail investors invest in index-tracker funds rather than actively-managed funds?
As we all know that there are two main institutional investments which are index fund and actively managed fund. However, it seems to be a hard problem when a retail investor who wants to make an institutional investment, perhaps most of them do not know which one deserve their investment.
Index funds refers to a kind of fund buying all or part of securities according to a standard formed by certain index, which aims to achieve the same level of returns of following the returns , and catch up the market growth at the same time. The index fund is a kind of passive management fund which is just opposite to the actively management fund. There are many characteristics of index fund.
1, Index Investing uses passive operation of tracking the benchmark index, which can make the costs of the funds operating and transaction into a minimum. Portfolio strategy can be adjusted by According to the change of the indexs Composition, and whats more, no fees will be paid about the investment research and analysis. So a lower management fee will be charged. On the other hand, the index investors tend to buy long-term holders of stocks, as opposed to active management by actively trading the formation of high turnover and must pay higher transaction costs, the investment of index funds does not take any adjustment to the investment portfolio initiatively, and the low cost of turnover transaction will be paid. These are quite different while compared with the actively managed fund.
2, The index fund has a high utilization of its money. All the investments of index funds are used to track the benchmark index, and it has no cash drag problems. But the traditional open-end fund with actively management will keep 5% -10% of cash in the portfolio at least to prepare for redemption. In addition, the index of investment is in highly transparent as it holds a replication of benchmark index . Investors can know the actual operation of the fund as long as they make a reference to the benchmark of index, which can help them get a sense of trust. And at the same time this is convenient for investors to track fund performance, and supervise the management and operation of the fund managers.
3, Index Investing can postpone long-term capital gains in order to achieve the delay of paying the income tax.
Because the index funds take the long term holding as a strategy, and the rate of turnover is very low, the capital gains will be often hanging in the account instead of changing into cash, it can be indefinitely delay the tax. And if all the index funds will reinvest the proceeds,the utilization of funds will step into a higher level.
4, In the past, whenever the fund manager, any change appears to the personnel of management, there will inevitably be a condition of assets without making adequate investments in the funds, and whats worse many funds will follow some of the original fund managers to other funds or companies. During a long-term investment process, the managers of the fund held by the investors may have several conversions, even though the original fund managers may have a better record, the replacement may increase the uncertainty about the persistence of fund performance. However the passive managed fund managers mainly deal with the role of very state of change, such as corporate dividends, stock splits, suspension and so on, so the same thing that happens to active managed fund will not appear on the index fund.
5, The management of active managed funds is often unable to go beyond the performance of long term index, Historical experience tells us that the number of managers of active managed fund in the world who can continue to beat the index fund are very rare. The famous fund research institution (Morning Star) obtained over the near 20 years concluding that the return on investment of index fund is better than 80% of the active managed fund, showing the need and value of index funds existence.
6, Studies have shown that more than 90% of the long-term return comes from the strategic allocation of asset, and the index investing is the most direct way to allocation of asset. Take pensions as an example,global pension fund to asset ratio of passive management has always played a large proportion of pension funds in which the larger the system the more perfect state, passive management, the higher the proportion of assets, of which 35% is the highest U.S. shows that the index of the long-term investments held by pension funds is quite consistent with the strategic asset allocation direction
7, Because index funds do not make the decision of the investment initiatively, the fund managers do not need to supervise the performance of the funds