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on your investment, you could safely say that you beat the market for last year even though NASDAQ might have been up 30%. Yes, beating the market is really relative to the index used for comparison.

Notwithstanding this vagueness, most of us always look for ways to beat the market. And that is the idea behind an actively managed fund. In an actively managed fund, the fund seeking to beat the market employs a good deal of research and analysis to pick those investments that can hopefully outperform the market. With this type of fund you may expect to pay a higher cost, as more work is involved in choosing the right portfolio. The fund certainly has the potential to do better than market averages, but there are downsides as well. For example, this actively managed fund may have a high turnover rate since the fund continuously replaces poor performing securities with potentially high performance ones as it chases better-than-average returns. This in turn may create a risk situation, as at times chasing after fast money has disastrous results. Higher turnovers are also another downside of the actively managed funds.

A passively managed fund on the other hand attempts to closely follow a certain index. As such they are also referred to as index funds. For example, a certain index fund may contain all 30 stocks of the DJIA in exact proportions in order to mimic the same return as the DJIA. Index funds are cheaper to operate and therefore less costly to the investors to own as there is little research necessary to set up their portfolios. The fund simply invests in the same securities in the same proportions as the index it is trying to follow. Since most indices are relatively stable as far as their portfolio makeup, most index funds have minimal turnover ratios. Index funds are also easier to follow. The investor could take one look at the corresponding index and determine how the fund is performing. Since index funds are designed to match the market performance rather than beat it, adverse market conditions …