Institutional Investment Essay Example | Topics and Well Written Essays - 2000 words

Institutional Investment - Essay Example As compared to other funds that can be termed as passively managed funds, the actively managed funds tend to have a higher expense ratio due to the stock-picking that goes on with this type of portfolio. On the other hand, an index fund is a collective investment scheme focusing on an index movement in the financial market with already set rules that have to remain constant regardless of the market dynamics that are supposedly affecting stock. (Kaushik, 2013, p.1) The tracking in here means it can be approached by holding all securities in the index with the same proportions of the stock being monitored as much statistically sampling the market and holding representative securities. Having the advantage of lower fees, the returns to the investors are few influenced as well as low costs are in the light of taxes. Actively managed equity mutual funds have trillions of dollars in assets, collect tens of billions in management fees, and are the subject of enormous attention from investor s, the press, and researchers; therefore the scrutiny of such funds come from all quarters their active management (Baks, Metrick and Watcher, 2001, p. 43-83). This is due to the fact that they are relevantly required to mature in a shorter period as compared to indexed funds and for years, many experts have been saying that investors would be better off in low-cost passively managed index funds. The brief of the active fund and index fund is two different investment strategy. The former is looking for the market to be misprice securities positively and seek to obtain market performances beyond target. While the later chose a particular index as an investment, not the manifestation of seek the market actively instead of trying to replicate the performance of an index (Philippe, 2002, p. 1-10). According to Jensen (1968, p. 389-400), most studies have found that the universe of mutual funds does not outperform its benchmarks after expenses and this evidence indicates that the average active mutual fund should be avoided hence the preference shifts to the indexed funds for the longer term investments. Other findings reveal that future abnormal returns â€Å"alphas† can be forecast using past returns or alphas, past fund inflows, and manager characteristics such as age, education, and SAT scores which goes a long way in their decision making with regard to financial knowledge. Base on the evidence, those alphas are possible to persistent, and that some managers own positives expectation on alphas as far as about 0.1 percent of all managers in the expectation and none do. Using current data and methods, it is not possible to distinguish between these two possibilities, but at the same time such small differences may have large consequences for investors. There has been rising popularity among the index funds, and this can be attributed to their excellent performance in the long run as they have outperformed their actively managed competitors as a whole. Tak ing a look at the mathematical aspect of the indices, the average active