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U.S. Securities and Exchange Commission

Mutual Funds Without Active Management

Q: Why do many individuals use passively managed mutual funds, known as index funds, to save for retirement and other financial goals?

A: Index funds try to equal, not beat, the returns of a major index, such as the S&P 500. Unlike actively managed mutual funds, which pick and choose investments based upon the research of the mutual fund managers, an index fund typically tracks the holdings of a chosen index through computer programmed buying and selling. Not surprisingly, the fees for index mutual funds generally are much lower than the fees for actively managed mutual funds.

When comparing similar mutual funds, lower fees can translate into better performance, according to researchers. In any given year, most actively managed funds do not "beat the market." In fact, studies show that very few actively managed funds, including those with impressive short term performance records, provide stronger-than-benchmark returns over long periods of time. Choosing a fund, of course, is a very personal decision. And remember that fees are only one important factor in your investment decision.

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A: You don't need permission to use Ask Investor Ed and other educational materials on the Investor Information section of the SEC's website. You may use, reproduce, and distribute these education materials free of copyright restrictions.



Modified: 07/17/2007