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7. Investing in Mutual Funds > Beware of the Closet Index Fund

Beware of the Closet Index Fund

Some actively managed mutual funds have portfolios that read like stock index funds, but their fees are higher.

Low-cost index funds are a genuine boon. Tracking broad or narrow sectors of the market, they are the perfect buy-and-hold investment for busy investors. What isn’t such a good deal are mutual funds that charge actively managed fund prices for index fund investments. These funds range from big names with well-known managers to smaller, more obscure funds. Their portfolios are nearly identical to that of an index fund. Why pay more for less return—when a plain vanilla, low-cost index fund can do the job just as well? You can identify and avoid these closet index funds by inspecting their portfolios under a microscope.


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