actively managed fund
Also called: active fund
A fund whose managers pick what to buy and sell, trying to beat an index; it usually charges a higher yearly fee than an index fund.
An actively managed fund employs managers who choose which companies or bonds to hold, trying to do better than a market index. That work costs money, so the yearly fee is usually higher than an index fund's, often around 1–2% a year instead of a few tenths of a percent.
The fee is certain; the extra return isn't. To be worth it, the fund has to beat its index by at least the difference in fees, year after year, and many actively managed funds end up behind their index once fees are paid. A strong past year doesn't show that the next ones will be strong too.
Before buying, compare the fund's yearly fee and any entry fee with a broad index fund, look at what it holds, and ask how it did after fees over long periods, not in its best year.
Example
Dana is offered a fund run by "experienced managers" at 2% a year, against an index fund at 0.3%. With 3,000 a month for 20 years and an assumed 5% a year above inflation before fees, she'd end with 985,323 UAH instead of 1,205,453: the active fund must beat its index by about 1.7% a year just to break even.
Common mistakes
- Buying last year's winner. One strong year says little about the next twenty.
- "Only 2%". It's 2% of the whole balance every year, which can be half of the growth over decades.
- Forgetting the entry fee. Some funds also charge to get in.