Index Fund vs Actively Managed Fund
**Index funds** track a benchmark with minimal trading. **Active funds** pick stocks and charge higher fees—few beat the index after fees over 15+ years.
Step by step
1. Compare expense ratios
0.03% index vs 0.75%+ active compounds hugely over decades.
2. Model net return
Assume market return minus fees for each option.
3. Tax drag
Active funds may distribute more taxable gains.
Index vs active
Core portfolio often index; active only if you accept fee drag and conviction.
- Index: Diversified; low fee; known tracking.
- Active: Potential alpha; higher fee; manager risk.
Common mistakes
- Chasing last year’s top performer
- Ignoring turnover and tax costs
FAQ
Are target-date funds active?
Often fund-of-funds—check underlying fees and glide path.