Our experience leads us to believe that index tracker funds have grown in popularity in recent years, with many claiming that their lower costs make them more attractive investments than actively-managed funds. However, it’s important to understand that cost is not the only factor to consider when choosing which funds to invest in.

Unlike actively-managed funds, index funds will track an underlying index, such as the FTSE All-Share Index, and offer a return linked to the index, less costs. This passive approach can make index funds cheaper than actively-managed funds, but not necessarily good value for money.

As well as cost, it’s essential to think about a fund’s diversification, management style, risk rating and performance. These elements all play a part in whether an investment fund is suitable for you and the financial goal you want to reach.

How Do Tracker Funds Perform?

As tracker funds are tied to an index, their performance always matches the index. In comparison, actively-managed funds have the potential for higher returns as fund managers can choose assets from outside the index and invest where they believe will produce better results.

From 1st January to 25th August this year, nearly 70% of active managers outperformed the FTSE All-Share Index. In fact, the average UK fund manager out performed the index by 4%.

Here’s a selection of index funds, compared against actively-managed funds from our True Potential Wealth Strategy Fund Range. You can see what investing £50,000 over the past three years in either index or active funds may have meant for your money, after fund charges.

Fund Ongoing Charge Figure 3-Year Performance* £50,000 after 3 years
True Potential SEI Aggressive 1.08% 41.73%** £68,595
Vanguard FTSE UK Equity Income Index Fund 0.22% 27.25% £63,206
True Potential Close Brothers Growth 0.84% 31.52%** £64,116
Vanguard LifeStrategy 80% Equity Fund 0.24% 27.90% £63,491
True Potential Schroders Balanced 1.26% 34.01%** £64,505
True Potential Close Brothers Balanced 0.84% 28.84%** £62,808
Vanguard LifeStrategy 60% Equity Fund 0.24% 23.54% £61,326

* All performance figures are sourced from Bloomberg
** Simulated performance

As you can see, you could have been over £5,000 better off after three years by choosing an actively-managed fund.

While index tracker funds are often sold on price, there’s much more to consider when investing for the long-term. While cost is important, it’s no benefit to choose on price if performance is weaker than an actively-managed fund.

We believe that actively-managed funds can offer a fair balance of cost and performance, making them better value investments than tracker funds. That’s why our True Potential Wealth Strategy Funds are sub-managed by our world-class investments partners. Our current partners are Schroders, SEI and Close Brothers and in the coming months, we’ll be adding funds sub-managed by Goldman Sachs, Allianz, Columbia Threadneedle and 7IM.

Learn more about the True Potential Wealth Strategy Fund Range >

Your capital is at risk. Investments can fluctuate in value and you may not get back the amount you invest. Past performance is not a guide to future performance. Tax rules can change at any time.

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