Jim Cramer says it's OK to buy managed mutual funds

In an interview with Newsweek about his latest book, a personal finance tome called Stay Mad For Life, Jim Cramer spoke out against the conventional wisdom about managed mutual funds:

Your book provides another departure from conventional wisdom. Lots of advisers believe actively managed mutual funds are a suckers' bet, since few managers can beat the indices year in and year out.

I myself was part of that orthodoxy. But when I look at the returns of hundreds of mutual funds, there are some managers who have done a great job. And everyone I talk to wants advice on mutual funds. An S&P 500 fund is OK if you don't want to spend the time. But there are some remarkable funds.

The basic argument against managed mutual funds was popularized by John Bogle, the founder of Vangaurd and inventor of the index fund. Hiring a professional money manager to invest investors' money detracts from the returns: managed funds nearly always have higher expense ratios than comparable index funds. Add in the unfavorable tax consequences of owning a fund that trades frequently and you have to beat the market by a lot to outperform an index fund with a managed fund. History has demonstrated amply that very, very few funds are able to do this and it is almost impossible to devise a way to predict which ones will.