Investing in a mutual fund?
Managing investments can have two different approaches either through active funds or passive funds. Depending on your personal preference and your investment requirement you can determine the right fit out of the two. Active and passive funds usually refer to mutual funds and you should research and read the fine lines before investing in either of them. If you are a beginner in the mutual fund investment space and want to understand the differences, this article is for you. So, let’s quickly understand the meaning and the differences between the two.
Active funds
Active fund management is often managed by the fund manager who actively decides how to invest funds. Market index plays a vital role and every stock is measured and evaluated based on the market indices. So, fund managers often aim to invest in those stocks that have the potential to outperform the market indices of the market benchmarks.
Passive funds
Passive funds, on the other hand, do not intend to beat the market index, instead, fund managers simply aim to mimic the benchmarks index and thus the investment decisions are made to just replicate the returns provided by the index as a whole. Hence, this is a good option if you are a novice in mutual fund investment as it doesn’t require you to be actively involved in the investments.
Let’s take a look at some basic differences:
- Frequency
Since active funds aim to book profits beyond the market benchmarks the fund managers often take a buy-sell approach. On the other hand, passive funds involve index-related research and hence you can follow the market benchmarks closely. If you are an investor who is interested in buying and holding, passive funds are for you.
- Expense ratio
Passive funds are a big hit among a large number of general investors due to low fees. Because passive funds simply follow the market index, the fees are lower than the fees involved in the active funds. Active funds require fund managers to perform in-depth research beyond the market index and hence fees are higher.
- Risk
If you are interested in funds that are not high-risk then passive funds are a better option out of the two. Although the fund managers are experts in this domain, sometimes human error and market volatility make active funds riskier.
- Benefits
If you are looking for a regular portfolio based on the standard Sensex and Nifty benchmarks opt for passive funds. Whereas, active funds will bring you alpha-generating funds by beating the market indices as the fund manager will use his experience and research.
- Strategy
To book higher profits, fund managers will frequently buy & sell and employ a rather aggressive strategy. Passive funds will copy the market benchmark to gain from regular profits. You can invest in them depending on your risk appetite and your investment requirement.
We hope this helps you make wise decisions when you invest in mutual funds. If you want more information or have any queries, we are just a call away!
