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Question:


With the level of volatility in the market, which is the better investment: mutual funds or index funds?
-SleeplessInSeattle


Answer:


The two categories aren’t mutually exclusive. Index funds can be mutual funds, although they don’t have to be, and vice versa. I think what you want to ask is whether it’s better to buy an index fund, which makes no active investment decisions beyond choosing a portfolio to match whichever index it follows, such as the Standard & Poor’s 500, or an actively managed fund.
 
If you’re looking for a fund that will trade with comparatively low volatility, then certain types of actively managed funds are preferable to others and preferable to index funds, which will be nearly exactly as volatile as the index they follow. Value funds, which focus on stocks of companies trading at low prices relative to earnings or the intrinsic worth of their assets, are likely to trade with smaller swings, as are funds that invest mostly in very large companies rather than smaller ones. Perhaps the best choice would be an income fund, one that specializes in stocks that have high dividend yields. The regular payments that these stocks offer make them especially well suited to defensive-minded investors.
-Conrad de Aenlle



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