Breakpoint

And finance allah shmoop what's the difference between mutual funds

and index funds The answer this guy or well this

team what do they do They manage the mutual fund

mutually together You know what nemo They make bets on

apple and amazon in crotchless tuxedo pants Dot com will

these bets or into teligent investments In the parlance of

the industry our elements oven actively managed fund The mutual

fund is active in that it buys and sells hoping

to be smarter than the market and find areas you

know where they're inefficiencies where investors are throwing out the

baby with the bath water so that they buy the

shares here a twelve bucks and hope to sell them

if they hit thirty bucks in two years when the

new products get released and people are going absolutely bonkers

for self velcro ing neckties or whatever and index generally

stands pat on the hand It's dealt throughout the course

of the year making only small tweaks to invested amount

so that the fund itself conforms to the structure or

rules it set out when it was created But there

are a few vital and insidious differences that should make

investors today very wary about investing in mutual funds or

any actively managed fund When mutual funds first became popular

the investing marketplace was kind of the wild wild west

that was the nineteen fifties and sixties and a savvy

fund manager could beat the market by five and even

twenty percent per year year over year It was kind

of a golden age of mutual funds and money flowed

into them But like all good things this market wrinkle

easy winds and the investing world had to come to

an end Why competition when there were only a few

mutual funds out there and a few private investors it

was relatively easy to identify baby bathwater things you know

diamonds in the rough Today there are literally thousands of

mutual funds With such massive competition performance relative to the

market has lagged dramatic In fact over a typical seven

to ten year holding period only a very small handful

of mutual funds beat the typical index fund investing in

the same or analogous areas of stocks or bonds It's

like one in twenty ever really beat the market and

it gets worse Mutual funds charge relatively large fees compared

With index funds whereas a typical index fund might charge

twenty basis points to manage your money that is twenty

cents for every hundred bucks you have with them for

year The analogous mutual fund My charge One percent or

more that's five times surprise for demonstrably no better investment

results and wait It gets even worse Mutual funds trade

stocks and bonds and other securities index funds rarely trade

or if they do it's a very small amount of

trading around the margin keeping index in compliance with its

legal charter But many mutual funds have turn over the

apple variety of like fifty eighty or even one hundred

percent Turn over means that a fund has sold the

stock to realize a taxable gain You know book a

profit by taking cash from selling the stock or to

realize a loss sometimes as well we'll each time of

fund transact It pays a commission to our friendly excellent

golf skilled brokers but more painful to most investors is

that in transacting the fund realizes taxable game So what

does that mean Well here's the math If your mutual

fund is up twelve percent given year when the market's

up ten percent it would be an absolute top of

the pyramid performance here For the fun of beating the

market by two hundred basis points would likely mean that

mutual fund was in the top forty right up there

with rina's latest it single So what is that awesome

performance after tax for the mutual fund Well if the

fund had traded like the typical one it would have

had turnover of about sixty percent of its assets and

half of those sales would get ordinary income tax treatment

think high rates of something like forty percent with federal

and state taxes combined for most and long term gain

of twenty percent for the rest Well the wealthy pay

higher taxes so we're rounding down the numbers here even

being conservative So if half of the sixty percent or

thirty percent of the gain of twelve percent which is

around four percent his tax at forty percent then take

away one point six percent from the performance to get

an after tax net result number Then after another thirty

percent tax at the long term gain rate of twenty

percent you'd have take away another point six percent so

in total you'd have to subtract one point six plus

point six or two point two percent from the twelve

percent humongous rock star year to net nine point eight

percent in after tax returns Nope not very exciting relative

to that index fund And yes there are differences here

even important ones But the bottom line is that if

a huge performance top two percent fun has results Not

much better and or maybe worse than just a basic

index funds Why does anyone invest in mutual funds anymore 00:04:49.487 --> [endTime] Well this guy