If index tracking MF are expected to do better than actively managed funds, why are investors paying ....?

Question

the far higher charges of the AMFs?

And why are the financial advisors recommending them?

Answer 1

Well most advisors work for large firms, and those firms make mutual funds.  They want to sell their products, and the advisers are good sales men who like to earn commissions.  Why investors are paying?  Sometimes they don't realize that their 401k plans and advisers are buying these funds up.

Answer 2

Some AMFs are worth it;  many, you are right, are not.

Answer 3

Index funds have the best risk/reward ratio. AMF's don't have  a little bit higher risk and with that comes higher rewards. Usually AMF tries to beat index by at least 3-5 points year over year. But it really become difficult in a long run (5-10 years).

But there are funds that have better returns than index funds. Investors buy them despite their higher cost. If an index fund returns 10% and costs 0.3% and an AMF return 15% and costs 1% the AMF is better in giving overall return.

It's true that lots of financial advisers recommend AMF because they get their cut from the sales but you can always look at the cost and last 5-10 years performance to check if the cost is really worth.

T. Row Price international discovery has done much better than the international index fund for a couple of years now.

Index funds are definitely for a beginner who doesn't want to study funds and go through their costs/performance comparisons.

AMF is not a completely NO-NO. One needs to investigate and make a decision.