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Risks and Returns of Different Mutual Funds

There are two different funds listed below for you to choose to invest in.

Question: What are the advantages and disadvantages of choosing the Arias Large Company Stock Fund compared to the Arias S&P 500 Index Fund?

- Arias S&P 500 Index Fund - this mutual fund tracks the S&P 500. Stocks in the fund are weighted exactly the same as they are in the S&P 500, minus expenses. With an index fund, the manager is not required to research stocks and make investment decisions, so fund expenses are usually low. This fund charges expenses of 0.20 percent of assets per year.

- Arias Large-Company Stock Fund - this fund invests primarily in large capitalization stocks of companies based in the US. The fund is managed by Melissa Arias and has outperformed the market in six of the last eight years. The fund charges 1.50% in expenses.

Solution Preview

The Large Company Stock Fund invests only in companies with large market capitalizations (generally defined as $5 billion or more). Though these are the largest companies in the world, and therefore generally considered to be the most stable (though recent history is proving that wrong), they are subject to risks, such as currency risk from foreign operations. Further, they tend to be in more mature industries; thus, they do not generally grow as fast as lesser-capitalized companies. However, because this fund is actively managed, the ...

Solution Summary

In this solution, I discuss the relative advantages and disadvantages of investing in an actively-managed large company stock fund versus a passively-invested S&P 500 fund.

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