Ask a Fool: Which Are Better -- Index Funds or Actively-Managed Mutual Funds?
Not necessarily. In fact, there’s a better case to be made in favor of index funds.
Perhaps the biggest difference between the two types of funds is their cost. Actively managed mutual funds employ highly-compensated professional investment managers to choose their holdings, and therefore tend to charge higher fees. Index funds, on the other hand, simply buy the stocks or bonds in a certain index, which allows them to operate with less overhead -- savings they generally pass on to customers. You can find index funds with expense ratios as low as 0.03%, while even a "cheap" actively managed mutual fund might have a 0.50% ratio.
Another difference between them lies in their objectives. Actively managed funds are looking to beat the market, which means making strategic bets. In any given year, some funds' bets will win, while others will lose. Index funds are, by definition, guaranteed to match the performance of the underlying index, minus your (hopefully) low fees.
Source: Fool.com
