The following is my answer to a Quora question: “Have
you moved your investments from actively managed mutual funds to passively
managed index tracking mutual funds?”
A passive fund mimics the index. It will never “beat” the market, but over an
extended investment horizon, it is guaranteed to do well due to the constant,
historical rise of the market. It is a
stable, steady growth.
An actively managed fund carries a higher risk, and
when managed well, performs well over a much shorter investment horizon of
between 5 to 10 years. They have the
possibility of beating the market by a significant margin, even by 20% or 30%. The downside is that they can also lose when
the market is rising.
Both funds have a place in any balanced portfolio.
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