| With time, new instruments are coming to the | | | | only market risk - risk arise as a result of market |
| financial markets which are supposed to be more | | | | volatility - but EIF have both market and |
| liquid, more flexible, more profitable and/or less | | | | management risks. Second is the high fee. |
| risky. Enhanced Index Funds or EIF are one of | | | | Although lower than most mutual funds, EIFs |
| these new products which enable traders to get | | | | have higher fees associated with them than |
| above normal return from markets. | | | | normal index funds. This is because the active |
| Enhanced index funds are mutual funds which fall | | | | management of the portfolio requires higher fees |
| into the category of Active Index Funds or AIF. | | | | (more buying and selling). |
| These index funds try to outperform the normal | | | | Investing in EIFs can offer both advantages and |
| index funds by active management of the fund | | | | disadvantages. |
| portfolio. EIFs try to beat the market by many | | | | Advantages of EIFs |
| means. | | | | |
| | | | 1. Higher return than most other index funds. |
| 1. By carefully managing the position sizes or | | | | 2. Increased portfolio diversity and less risk as |
| allocation to a index or sector. | | | | you are investing in a broad index. |
| 2. By fine-tuning the market entry and exit | | | | 3. Lower expense ratio than most mutual funds. |
| timings. | | | | 4. Suitable for all type of investors. |
| 3. By investing only in certain securities of the | | | | 5. Advantages from semi-active fund |
| index which satisfy certain rules. | | | | management which enable investors to profit |
| 4. By avoiding certain securities which are prone | | | | from changing market conditions. |
| to underperformance. | | | | Disadvantages of EIFs |
| 5. By carefully utilizing the leverage and other | | | | |
| tools. | | | | 1. More risk than normal index funds. |
| 6. By periodically (often) changing the portfolio | | | | 2. High expense ratio than index funds. |
| allocations and investment preferences with | | | | 3. No sufficient performance history available as |
| change in market performances or trends. | | | | they are newer instruments. |
| EIFs trades just like any other index funds but | | | | 4. Risk of losing capital because of ineffective |
| they have two important differences associated | | | | fund management. |
| with them. First is they involve management risk - | | | | Investors are advised to carefully choose EIF |
| the risk arise as a result of (ineffective) active | | | | after properly understanding the funds asset |
| fund management. All normal index funds have | | | | allocation and active management strategies. |