hr: Money

The idea of mutual funds is, that by investing in carefully selected assets, you can get a higher rate of return, than the market is currently giving you. The question really is, what is the market? People measure the market by the appropriate index that is used.

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So how is the market index set? The index is determined by experts who feel that the underlying stocks are representative of the market as a whole. So the only thing that mutual funds do, is to better that performance, for which you are paying them a fee. Sounds rather simple right?

The problem is, that it’s not at all easy to beat the market. A theory called The Efficient Market Hypothesis states that it is impossible to consistently beat the market. While it is true that certain investors like Warren Buffet have managed to beat the market consistently, we are not all like him, and even if the theory is not true, there’s no smoke without fire.

This means that most mutual funds are not going to outperform the market. I have written another article on Investing in Index Funds that recommends only investing in the standard index to stay on par with the market.

The reason is, that index funds don’t have active management, and are in fact, passively managed. This means that there are no costs associated with the funds, and is likely to be your best investment strategy.