Broadly speaking, there are two approaches to investing: Actively managed funds, where a portfolio manager or management team moves your money around depending on their predictions of where best to invest; or passively managed funds, also known as index tracking, where your money is invested in proportion to the securities in an index, and is left to grow over the long-term.
But which is best? Well, statistics tell us that only one in five actively-managed funds ever beats the market. Which is hardly surprising, considering that bar some kind of psychic ability, it’s impossible to predict exactly what’s going to transpire in the future! Add to this the fact that actively managed funds come with higher costs which reduce your real return, and active management starts to look even more unattractive. Nevertheless, this kind of guesswork is precisely what many fund managers do –shuffling your money around and putting you at risk for serious loss should their predictions prove false.
Call us conservative, but at 10X we’d rather not take this kind of risk with your money. We believe in playing the long game, and that the secret to long-term growth lies in a low cost index tracking fund. But don’t just take it from us - have a look at the below comparison to see just how active management and index tracking compare.
Index Funds vs Actively Managed Funds
| Index | Actively Managed | |
|---|---|---|
| Goal | To match the performance of an index as closely as possible | To outperform the index |
| Strategy | Buy all (or a representative sample) of the securities in the index | Use research, market forecasting, and a portfolio manager or management team to predict which securities might perform the best |
| Tax | Tax efficient | Can be subject to additional tax |
| Expenses | Typically lower fees because less management required | Typically higher fees because more expensive management costs. Cost on average 1% more than their passive counterparts |
| Performance | Most reliable over the long-term | Less predictable over the long term |
| How they compare to the Index | Mirrors return of index it tracks | Only 1 in 5 actively managed funds beat the market |
The Conclusion
If you’re looking to invest over the long-term, index tracking is the way to go. But that doesn’t mean that all index trackers are equal. Remember that the kind of fund is only one element to consider, and for the best results use a provider such as 10X that maximizes your long-term gains with low fees.
Feeling confident about index tracking? Why not consider 10X’s Unit Trusts today. To find out more visit our page here.
