What Fund Is Right For You?

If you're looking for a new fund, whether a mutual fund or an ETF, you'll encounter many options. One key question will come up though: Should you choose an active or an index fund?

Both types have their pros and cons. This post aims to clarify these differences to help you decide by focus on three main factors: Performance, Cost, and Fund Family. While other factors are worth considering, these three are essential to weigh.

Performance

The future performance of a fund derives from various influences, but two of the most consequential are the index they track and past performance.

First and unequivocally, performance for all funds is shaped by the index followed. When you invest in a short-term government treasury fund, you shouldn't expect to lose money, but gains will be minimal due to their stable nature.

In contrast, total market funds can lead to significant gains or losses, as they invest in less stable assets. The index a fund tracks is critical when selecting a fund, as it sets the benchmark for performance.

Secondly, past performance can shape the future for active funds but not indexes.

Active funds require careful research because their past performance can indicate future success, since they tend to show a clear pattern of either winning or losing relative to their peers.

Since not all active fund managers can succeed, after all not every fund can be in the top 20%, most underperform their benchmarks. Meanwhile, those that outperform often have well-defined strategies that make it more likely they will continue to outperform their peers.

Many investors today prefer index funds because they come with lower costs and eliminate the uncertainty of whether a manager will outperform their peers and the index. It's worth noting that around 80% of actively managed funds underperform their respective indexes, which makes index funds a safer option for risk-averse investors.

Cost

Fees are an important consideration for every investor and with funds there are three types of fees: Transaction, Load, and Expense Ratio fees. We believe it is best to avoid Transaction and Load fees since they often hinder performance.

Transaction Fees

Transaction fees are costs a broker or advisor charges when you purchase a fund for using their services in selecting it, acting as a commission.

Most brokerages offer funds that are exempt from these fees nowadays and many advisors avoid making money from this model entirely in 2025.

Loads

The next type of fee is known as a funds load.

A load is the cost to either buy in, continue to own, or sell a fund. Loads used to be the price of admission in the world of mutual funds. They were used to advertise funds to investors through 12b-1 fees, pay salespeople for selling them through front-loaded fees, and discourage investors from selling them through back-end fees. But, in 2025, loads are avoidable since competition has mostly made such fees a relic.

Expense Ratios

The final type of fee is a funds expense ratio, which represents the daily operating cost of the fund. Essentially, funds are businesses, and they incur expenditures to run them.

Index funds usually have lower expense ratios than active funds because they have fewer operational costs.

Active funds, meanwhile, try to outperform indexes through more frequent trading, complex strategies, and additional research, which cost more but do not guarentee outperformance.

Fund Family

The term "Fund Family" refers to the various funds offered by a specific company. Examples include Ark and Vanguard funds.

Choosing the right fund family can help investors reduce fees and improve potential performance. Larger fund families can spread costs and share research, leading to lower fees and a competitive advantage.

In Summary

When choosing a fund, whether active or indexed, considering the funds index, managing its costs, and selecting a reputable fund family are essential.

For a higher chance of growing your money with moderate risk, invest in a mix of low-expense, total market index funds that include both domestic and foreign stocks, along with some bond funds.

If you are unsure how you should invest your money or would prefer professional management, Lundeen Abrams Advisors is here to help. We regularly help our clients determine the best mixture of investments and implement a plan to make their money work harder for them. To setup a consultation, please give us a call so we can schedule a meeting today!