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Active vs. Passive

QWhat are "actively managed" mutual funds?

- M.L., Omaha, Neb.

AActively managed funds are run by professionals who try to maximize performance by hand-picking investments. Investments in passively managed funds, on the other hand, simply mirror the components of an existing index (thus their more common name, index funds). For example, an index fund based on the Standard & Poor's 500 will hold the 500 stocks in that index, in the same proportion as the index. The irony we love to point out is that the vast majority of actively managed stock funds underperform the overall stock market - and the index funds that match it. Perhaps the biggest reason is costs, since passively managed funds don't need to employ lots of analysts just to mimic an index. Most investors are generally better off having at least some assets in index investments.

Learn more about mutual funds and index funds at www.indexfunds.com and research them at www.morningstar.com. Also, check out (for free) our Motley Fool Champion Funds newsletter that recommends exceptional low-fee mutual funds - it's at www.championfunds.fool.com.

Q What's a money market fund? - T.H., Knoxville, Tenn.

A It's a mutual fund that buys goodies such as Treasury bills, shortterm commercial debt and certificates of deposit. It sticks to short-term, highquality investments and is relatively safe. Money market yields vary according to short-term interest rates and typically top rates offered by standard bank accounts. But they fall dramatically short of the stock market's historical average annual return of 10 percent. They're great for short-term savings, but are ill-suited for long-term investments. Learn more about short-term savings and find good rates for your money at www.fool.com/savings and www.bankrate.com.

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