Passive mutual funds are the new hot shot in the stock market industry. Several investors are adopting the passive investment management strategy for their mutual fund investments. From an investor’s point of view, it is essential that you understand the differences between the active style of management and the passive style of management to decide which style of management is ideal for your investment portfolio. In this article, we will understand the differences between these two styles of management and understand which is better for investment.
Several mutual fund experts believe that passive funds have generously beaten the active funds over the past few years. As a result, several investors have shown keen interest towards passive style of investing. But, what is passive investing exactly? Passive investing is a buy and hold investment strategy wherein an investor tracks a particular commodity or market index. Usually suitable for long-term investors, passive style of investing aims to earn maximum returns from their mutual fund investment by tracking the fund’s underlying stock market index closely. Common stock market indices that an investor chooses to invest are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). As a result, the fund manager does not need to actively track the markets.
On the other hand, under active style of investing, the fund manager invests in companies’ basis the research of the team. As a result, the fund manager of active funds closely tracks the markets and invest in companies that have potential to outperform the markets.
Active vs passive funds
The following table aims to provide the major differences between the two style of management – Active vs passive style of investing:
|Passive style of investment
|Active style of investment
|Fund managers try to mimic the bench market indices
|The fund manager can change the fund’s composition basis their research
|The returns are closely similar to that of the bench market index
|Fund manager aims to beat the market and earn higher returns
|Up to 1%
|Somewhere between 0.08% to 2.25% basis the composition of the fund – i.e. equity oriented fund or debt oriented fund
Which is better for investing? Active style of management or passive style of management
The choice between active and passive style of management must depend on your investment portfolio. Analyse your financial goals, risk profile, and investment horizon to make a better decision. A good investment strategy would be having a blend of both active funds and passive funds. Investors with a conservative approach towards investing can consider investing a higher proportion of their assets towards passive funds. On the other hand, if you have a moderate to high risk profile, you can consider investing a higher allocation towards active mutual funds. So, what are you waiting for? Irrespective of the fact that you go forward with active style of management or passive style of management, you must begin with your financial planning as early as possible and begin with your investment journey. Happy investing!