Question

At a cocktail party, your colleague claims that she has found the best actively-managed mutual fund that consistently outperforms its benchmark. Although you believe her, you think she is missing very critical points. What are those points? Name at least four.

Answer 1

Four main points are-

A. Active mutual fund do not believe in the concept of Efficient market hypothesis and it will believe that the market can be outperformed, but the the large number of underperformance of actively managed mutual fund reflect something else

B. Passively managed Mutual Funds never underperforms the index rate of return because they are always replicating the index.

C. One should also be keeping in mind that active Mutual Funds will be having a higher fees when there parking their money in active mutual funds

D. Active Mutual Funds are also continuously reshuffling their portfolio and hence it provide the risk of not holding the Asset in the long run and it leads to their under performance in the long run so they mostly work for short term.