- Some mutual funds are actively managed by a professional analyst who researches the markets and makes decisions about the fund designed to earn investors the best possible rate of return. An index fund, on the other hand, is not managed. Index funds own the same stocks that major market indices, such as the S&P 500 own. According to a study performed by Motley Fool, on average, index funds have outperformed managed funds by 2 percent per year. Thus, investors are likely better off choosing an index fund.
- As of 2011, long term government bond yields were just below 5 percent. The average bond fund has produced similar returns over the years. While bond, or income funds are more stable during bear market conditions, they have significantly underperformed stock funds, which have earned more than 10 percent per year on average. The type of fund that is best for you depends on your investment time frame. If you can hold your fund for 5 years or more, you are likely to do better owning a stock fund.
- It appears to be a dying practice, but some mutual fund companies still charge customers a sales fee, called a load. Sales loads are deducted up front when you buy your fund. Loaded funds can have a big impact on your fund's performance over the first few years. For example, if you invest $100,000 into a fund that charges a 5 percent load, you will have only $95,000 working to earn interest for you. Choosing a no-load fund will improve your performance from the beginning.
- All mutual funds charge fees to pay for administrative and management expenses that are deducted from the fund's performance. Choosing a fund with lower fees can have a significant impact on the ongoing performance of your fund. Funds that charge high management fees don't necessarily outperform funds with lower fees. Index funds that aren't managed outperform most managed funds, so you aren't necessarily getting a better deal if you buy a fund that has high management fees.
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