Question

1. Compare and contrast index fund and active fund. Provide relevant examples of these
and explain what their objective is.

2.Jimmy Enterprises Inc. has twenty years remaining on Ghc 1,000 par value
semiannual coupon bonds paying a coupon of Ghc40. If the yield to maturity on these
bonds is 6% per year, what is the current price?

Answer 1

1. Index fund are majorly passive funds which are focused at investing into the similar proportion of an index and they are just replicating an index of an entire market.

Active funds are those Mutual Funds who are continuously readjusting their portfolio based upon the market sentiments and market cycles and they are not passive in nature so they will be continuously synchronising their portfolio in line with the market trends.

The management fees of passive funds or index fund will be comparatively lower than fees of active funds.

From the empirical evidences, it can be said that index fund has continuously outperformed the active fund to a large extent.

Index funds believe in the philosophy of Efficient market hypothesis where as active funds do not believe in the philosophy of Efficient market hypothesis.

Objective of active funds is to continuously outperform the market rate of return whereas objective of index fund is just to provide a rate of return which is in line with the indexes and the market, so that the investor is never underperforming the market.