Why invest in mutual funds when they have lower long-term return rates than actively managed funds?

Are you trying to ask about index funds?

85-90% of actively managed funds under-perform their corresponding index.

That being said, it doesn't take a genius to find the 10-15% that beat the corresponding index. And yes, an extra percent or two a year can make a HUGE difference over a long period of time.

One does need to stay on top of things though as performance can change over time. For example, Janus Worldwide fund was an EXCELLENT fund back when Helen what'shername managed it. A change in fund managers can be brutal.

P.S. To answer your actual question...some reasons people prefer index funds are:

1) They're easy/no-brainers

2) They're diversified

3) They are more tax efficient than actively managed funds

Two things you didn't take into consideration when setting up your example:

1) An actively managed mid-cap fund like the one you mentioned does not have the same kinds of investments that S&P 500 has in terms of diversification; and

2) You didn't consider taxation when calculating your rate of return. Index funds are very tax efficient. Large capital gains distributions are rare and are virtually never short-term gains. Some actively managed funds literally churn stocks thereby making large taxable cap gain distributions often a portion of which are short-term gains. Investors can get soaked with a cap gain distribution even in years when the fund performance is negative. The money to pay the yearly tax bill has to come from somewhere...

Actively managed funds are great for people who are willing to put in the time to evaluate/choose/monitor them and who understand all the implications of their choices including risk/diversification and taxation.

You need to look at a broader fund families . I had both actively managed funds and Index funds and ended up selling most actively managed funds . Also Index funds have much lower internal capitol gains because no manager is churning the holdings chasing higher returns . I have looked at the top 10 mutual funds in every category and 7 to 8 out of the 10 are index funds . I think you have something personal to gain trying to convince people actively managed do better in the long run . They don't especially considering internal capitol gains .

That's absolutely untrue. A HANDFUL of actively managed funds consistently outperform the index funds.

I recommend investors have, well do their own research and own stocks, but if they do invest in funds or 401K to have a mix of Index and actively managed funds.

The difference you see is more due to the invest perimeters and not that one is an index and one is actively managed. We are in year 10 of a aggressive bull market and you are comparing an S&P 500 index fund to an aggressive smaller cap stock fund. Check the returns once a recession rolls around, that difference in returns will narrow if not flip.

are you talking about INDEX funds? Some people want to mirror an index.

Everyone does not know about index funds. And some prefer to attempt higher returns I guess.