Question

If the Fed normalizes its monetary policy, passive mutual funds will continue outperform actively managed accounts? Explain thoroughly.

Answer 1

Let us first understand what is passive mutual funds and actively managed accounts.

Passive mutual funds is nothing but continously investing on a same portfolio or already selected number of stocks.

Actively managed mutual fund is managed by list of professionals who changes the weightage of each stock and remove the stocks which are not performing well. They do research on the stocks before making any changes.

Here, when the fed normalizes its monetary policy, it will be beneficial for passive mutual fund holders, as there is no additional charges to be paid by investors. On the other hand, there will be certain charges for active managed accounts.

When the monetary policy is soften, all stock price will goes up. Basically if the interest rate comes down, all the companies with high debt will goes up (shares of debt companies). It is nothing but the companies need to pay less interest compared with previous scenario (before monetary policy soften).

When the actively managed stock usually has high fundamental value and less debt compaed with passive management stock.

This is one of the major reason behind passively managed funds get benefited by monetory policy.