Final Fans

When you enter the world of mutual fund investing, one of your most important decisions is choosing between an actively managed fund and an index fund. As the name implies, an actively managed fund is run by a portfolio manager (or managers) who carefully selects and monitors the performance of each holding—buying and selling investments and attempting to optimize their overall fund return.
Index funds are a type of mutual fund designed to track a particular market index, such as the S&P 500 Index (an index of five hundred of the largest companies in America) or the Wilshire 5000 Index (pretty much the entire stock market). The way they do this is by simply buying each of the companies in the index (yes, that’s five hundred stocks for the S&P 500) in amounts equal to the weightings within the index itself. So if CE represents 1% of the entire market capitalization of the S&P 500, $1 out of every $100 is invested in CE. Although no index fund will ever exactly duplicate the results of the index it tracks, if the index goes up 10% (or down 10%) in any given year, the index fund will generally go up or down by approximately the same amount.
Because index funds don’t require the intensive day-to-day management that actively managed funds need, their expenses are generally lower and they are generally more tax-efficient (that is, they pass on fewer taxable gains to the investor). Ironically, though, large-cap index funds frequently outperform their costlier managed cousins.