Why Mutual Funds are better than Index Funds
I have heard many people criticize Mutual Funds, especially in comparision to Index funds, citing two main reasons:
-80% are outperformed by the S&P 500
-managment fees are too high
Thus they put their money into index funds. But nobody seems to figure out that the reason most underperform the index is in order to create less fluctuation (variance) for those who want to generate income from their investments (generally older people close to or past their retirement). Most of these people would freak if they saw the swings the indexes take. So the Mutual fund industry is trying to appease the requirments of their clients.
Secondly, there are still the remaining 20% that outperform the market with proven track records and excellent managers at their helm. There are thousands of Mutual funds to choose from, and you should only place your money in a few of the best ones. There are all sorts of books generated on a yearly basis giving the top picks.
Therefore, when you select a mutual fund that has outperformed the index over ten years after management expenses, and with less fluctuation, you have a winner. It is worth the management expense.
If people are serious about making money on the markets, they should not buy index funds. A good value invested Mutual Fund is superior.
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