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Example research essay topic: Passively Managed Bond Funds Vs Actively - 1,402 words

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PASSIVELY- MANAGED BOND FUNDS Vs ACTIVELY- MANAGED BOND FUNDS 1. ABSTRACT The bond index fund seems to be growing concept in financial history. Investors in bond market is also gradually increasing. Though, bond index is gradually increasing in mutual fund market, only 3 % of all bond funds assets are in bond index funds, and most of these funds are held excessively by institutional investors, who sustain about 25 % of their bond fund assets in bond index funds. Information on price movements on bond is considerably less as compared to the information available on stock. Investors may not access adequate price movement of bonds as in stock market.

This paper analyze both actively managed bond funds and passively managed bond funds in brief and discuss about the preferable investment decisions of these funds. OUTLINE INTRODUCTION ACTIVELY MANAGED BOND FUNDS PASSIVELY MANAGED BOND FUNDS PASSIVELY MANAGED BOND FUNDS VS ACTIVELY MANAGED BOND FUNDS CONCLUSION INTRODUCTION Investment criteria's in bond market includes cost and risk rather than investment in stocks. Decisions are derived only based on these criteria. This is mainly due to the way in which these stocks are being traded, the extent of publicly accessible information available about bonds and the prospective intentions of broker dealers who hold large in-house bond inventories. Investment criteria in bond market can be evaluated through its performance. Based on performance measurement it is possible to assess which fund market plays a better role in achieving higher returns with lower investment.

In recent years, mutual fund market has become a re searchable topic in the aspects of its performance. Research has shown that mutual funds, on an average, finding it difficult to beat the passively managed fund market. The paper contribute wide information on the fund market activity and investors preferences with empirical datas. ACTIVELY MANAGED BOND FUNDS: It refers a mutual fund that focuses its attention by investing in a portfolio of securities with the purpose of earning higher rate of return rather than a benchmark index. With the help of portfolio managers and analyst it selects securities for investment. Actively managed fund is just contrary to passively traded funds.

A passive fund constructs a portfolio that reflects the security holdings and load of a benchmark index. This type of investment mandates premeditated and purposeful research and the choice of securities for the mutual fund. The basic presumption of these categories of investors is that market is inefficient as these investors always seek opportunities when holdings are trading more or less than they are actually worth. In an active investing, there shall be sufficient frequency of opportunities and the value to cover the cost of frequency after and executing trades. Portfolio manager tries to strike the market by trading bonds which is under or over valued or timing the direction of future interest rate movements. PASSIVELY MANAGED BOND FUNDS: It refers to a portfolio of investments that is designed to reflect a well known index.

As in the case of well known index, the load and investment choices are already weighed, it reduces the job of fund manager to involve in security research. The only job the fund manager has to do is to adjust the fund holding as and when there is a change in the index. Due to the investment strategy, the same is known as passive. In these types of mutual fund, there always be a smaller tax bills and lower transaction costs than actively managed funds. In passive investing, the investors assume that chances to exploit are too little and far between effective pursue. The investors thus enjoy a low level of management cost in these types of investments.

The fund manager invest in bond portfolios by analyzing appropriate bonds that fit particular specifications for that clients unique fixed-income portfolio, reducing the final bond choice based on minimizing markups and markdowns and thus guaranteeing sufficient bond quality to lessen the opportunity for default, calls or other unexpected events that can cause a portfolio to swerve off from its goals. PASSIVELY MANAGED BOND FUNDS VS ACTIVELY MANAGED BOND FUNDS: Investors prefer passively managed bond funds than actively managed bond funds because they deem that actively managed bond funds would be riskier and would drip on the future course of individual economic scale. This is because investors feels that passively managed bond funds yields lesser management fee and also offer reduced flux in returns. Another added advantage of the passively managed bond funds is, it provides the people information on funds performance in comparison to the existing index. Moreover, passively managed bonds allows public to select their bonds from the bond index where the inclusion of bonds in the indices were based on benchmarks framed by the independent index provider. In addition, in future course of time, mutual funds because of their cost and risk, would probably underperform the stock market returns.

Few empirical datas provide us information on the performance of actively managed bond funds. Cesar and Panetta (1988) has scrutinized the performance of Italian Mutual Funds which has typically established non-significance and overall negative performance, rather, when interest is paid on investment it showed a positive performance. Similarly, studies performed by Cai, Chan, and Yamada (1997) for Japanese open-type bond market for the period of 1981 - 1992 and Blake and Timmermann for UK based mutual funds (1972 - 1995) has stated the under performance of these bond markets. Another study by Does and Walker (1996) on US based mutual fund has identified that the expense ratio of the US equity funds are extensively related to funds performance, i.

e. the higher the expense ratio of the funds, higher the returns. This is ultimately the result of Survivorship bias. Certainly, such risk-adjusted returns of managed funds would lead them to underperform their benchmarks. Moreover, the investors to actively managed bonds seems to much less when compared to the stock market. This is because of one significant reason, survivorship bias where risk factors are not perfectly taken into account.

Another factor which influence the performance of the managed funds are the size of the funds. Many empirical datas has proved that, lager the funds size larger the loss in returns. This is proved by Into, et al. (1999), which describes that as funds size increases, the return on funds starts dropping. CONCLUSION In spite of the fact that managed funds provide inevitably higher risk- adjusted return, investors prefer to invest in these funds.

This is because mutual funds provides constant income in form of interest for the purchased bond until the investment is returned. Furthermore, it provides the buyer an advantage of diversification, i. e. by buying a single mutual fund the buyer gets an opportunity of investing in several different companies. Also the investment on mutual fund like other individual stocks can be easily converted into money at any proposed period by the investor.

Moreover, investors prefer managed funds due to lack of knowledge in selecting funds with appropriate market returns. Hence, managed fund shareholder consider investment advisor as a credible source for investment advice. Another factor influencing the managed fund investors is their belief in past performance of managed funds which provides credibility in relation to the future performance of the managed funds. In general managed fund investors are risk-seekers than index fund investors. REFERENCES Brown, S. J. , W.

Gotezmann, R. G. Ib boston, S. A. Ross. Survivorship Bias in Performance Studies, Review of Financial Studies 5 (4), 553 - 580. (1992).

Blake, S. J. , A. Timmermann. Mutual Fund Performance: Evidence from the U. K, European Finance Review. 2 (1), 57 - 77. (1992).

Cai, J. , K. C. Chan, T. Yamada.

The Performance of Japanese Mutual Funds, Review of Financial Studies. 10 (2), 237 - 273. (1997). Bibliography: Jaffe, Charles A. Chuck Jaffe's Lifetime Guide to Mutual Funds: An Owner's Manual. Cambridge, MA: Perseus Publishing, 2000. Lichtenstein, Donald R. , Patrick J. Kaufmann, and Santa Bhagat. "Why Consumers Choose Managed Mutual Funds over Index Funds: Hypotheses from Consumer Behavior. " Journal of Consumer Affairs 33. 1 (1999): 187.

Stuart Zimmerman. Build Customized Bond Portfolios: Take Your Registered Investment Advisory Practice to the Next Level. Journal of Accountancy. 199. 4. (2005). 38 +. Alexander, Gordon J. , Jonathan D.

Jones, and Peter J. Night, Report of the OCC/SEC Survey of Mutual Fund Investors. (1996). Belly, Gary. Why Smart People Make Money Mistakes, Money, (July, 1995). 76 - 85.


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