Index Funds vs Active Management: What Super Investors Need to Know
Introduction
Super funds offer both index-based and actively managed options. Understanding the differences helps members choose the approach best suited to their retirement goals.
1. Defining Index Funds and Active Management
Index funds aim to replicate a market index passively, while active management involves fund managers selecting stocks to outperform benchmarks.
2. Cost Comparison
Index funds typically charge lower fees due to minimal trading, whereas active funds incur higher costs for research and portfolio management.
3. Performance Potential
Active managers seek alpha but may underperform during volatile markets. Index funds offer consistent market returns but no outperformance.
4. Risk Profiles
Active strategies can concentrate risk in select stocks, potentially leading to higher volatility. Index funds spread risk across all index constituents.
Conclusion
Choosing between index and active options depends on cost sensitivity, return expectations, and risk appetite. A blended approach may offer balanced outcomes.