How Do Mutual Funds Work?

Mutual Funds can fall into various catgeroies depending on how you look at the market and the mutual funds themselves. The fees together with their performance will more or less depend on whether they are actively or passively managed.

The passively managed funds are about investing according to a planned and well set strategy.

These types of mutual funds are trying to match the performance of a specific market index, this means that they need little investment skill. They as well need little management which mean that for the most part they carry lower fees than actively managed funds.

And when it comes to the actively managed funds then we are talking about mutual funds which have a manager or team making decisions about how to invest the fund’s money.

These type of mutual funds are very often trying to outperform the market or a benchmark index. Bur for the most part the results show that passive investing strategies often deliver better returns.

So lets go back to the passive investing before we end this to mention two most popular types of mutual funds for passive investing

The first type are the Exchange-traded funds (ETFs). Which can be traded like individual stocks but also offer the diversification benefits of mutual funds.

These funds are generally charging a lower fees than traditional mutual funds, but active traders might find their costs too high.

The second type are the Index funds which track a market index. The most known examples to this type are Nasdaq and S&P 500.

These type of funds are put together of the stocks of companies listed on a particular index, so the risk mirrors that of the market, as do the returns.


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