New instruments that are coming today to the financial markets are supposed to be more liquid, more flexible, more profitable and less risky. Here should be mentioned Enhanced Index Funds (EIF) that are one of these new products which make possible for the traders to get above normal return from markets.

As a matter of fact, enhanced index funds are mutual funds which fall into the category of Active Index Funds or AIF and these index funds try to outperform the normal index funds by active management of the fund portfolio. It should be also pointed out that EIFs try to beat the market by lots of means and some of them are the following:

1. Investment in only certain securities of the index that satisfy certain rules.

2. Careful managing the position sizes or allocation to a index or sector.

3. Careful utilizing the leverage.

4. Fine-tune the market entry and exit timings.

5. Avoid some securities which are prone to underperformance.

6. Often change of the portfolio allocations and investment preferences with change in market performances or trends.

There are two important differences associated with EIFs trades that make them different from the other index funds. The first is one is that they involve management risk – the risk arise as a result of (ineffective) active fund management. As you probably know, all normal index funds have only market risk (risk arise as a result of market volatility) but as concerning EIF they have both market and management risks. The high fee is the second difference. Although lower than most mutual funds, EIFs have higher fees associated with them than normal index funds. And the reason for this is that the active management of the portfolio requires higher fees (to purchase and sell more).

There are both advantages and disadvantages when you are dealing with investment in EIFs.

Let’s start with the advantages of EIFs and they are:

• It is suitable for all type of investors.

• Return is higher than with most other index funds.

• The expense ratio is lower than with most mutual funds.

• As it is a broad index investment, so, you get increased portfolio diversity and less risk.

Advantages from semi-active fund management which enables investors to profit from changing market conditions.

As concerning the disadvantages of investment in EIFs, they are:

• There is more risk than with normal index funds.

• The expense ratio is higher in comparison to the index funds.

• Due to ineffective fund management there is a risk of losing capital.

• Because they are newer instruments there is no sufficient performance history available.

It is highly recommended by the professionals in the sphere of investment to choose EIF very carefully after properly understanding active management strategies and the funds asset allocation.

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