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Are you in the year’s best funds?

By Sheyna Steiner · Bankrate.com
Friday, August 17, 2012
Posted: 6 am ET

Passively managed funds have served up better returns than their actively managed counterparts in the first half of 2012, a story on Morningstar.com, "Passive Success," reported last week.

The story does note that index funds have only modestly beat actively managed funds. However, index funds have picked up more investors while actively managed funds have lost money.

Through June, the broad universe of actively managed U.S. stock funds has shed nearly $50 billion in 2012, en route to what seems a certain sixth consecutive year of net redemptions. On the passively managed side, however, investors have sent more than $41 billion to domestic-equity vehicles so far this year.

Passively managed mutual funds follow an index, tracking an entire sector or group of stocks, rather than picking and choosing possible outperformers. Investors in index funds will receive returns equal to the market they track, while active fund investors are hoping the fund manager or management team will pick companies that will do better than average.

That comes with a cost, however. The expense ratio, the fees mutual fund companies charge for running the fund, will typically be higher in an actively managed fund as compared to an index fund. According to the Investment Company Institute, or ICI, the average expense ratio of actively managed funds in 2011 was 93 basis points, as opposed to the 14 basis points charged on average by index funds.

That translates to 93 cents for every $100 invested or 14 cents, respectively, ICI explains in the 2012 Investment Company Fact Book in the chapter on mutual fund expenses and load fees.

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