What are the differences between active and passive investing? And which one is better?

Active investing means there is a Fund Manager & a Fund Management Team that will research the companies and identify the stocks to buy / sell.

In case of passive investing, there is no role played by a fund manager or the team to identify the stocks to buy/sell. Eg. NIFTY Index Fund - where the stocks are bought in such proportion that the portfolio mirrors the NIFTY.

Passively managed funds have lower cost as compared to Actively managed funds. However, this does not necessarily mean that Passively managed funds yield a better return than Actively managed funds. Over a fairly long period - 5 years or more - many actively managed funds have outperformed the Passively managed funds. 

 

 

Major difference in active and passive investing is in style of investment and cost of fund management. Active investing involves portfolio creation based on fund manager's style of investing which includes growth or value biases, fundmental analysis of various sectors and stock selection approach. In case of passive investing , stock selection and allocation weightage mirrors the underlying index or benchmark. Active investing involves lot more fund maanger involvement while passive investing involves limited role to be played by fund manager . Therefore, cost of active investing is almost always higher than passive investing.

In nutshell, Active Fund manager endeavours to beat the benchmark in order to create alpha and thereby justify higher expenses.

Active Investing means Fund Manager or Portfolio Manager actively takes decision with the portfolio on Regular Basis to generate the Returns Over and Above the Benchmark to Generate Alpha Returns.

Passive Investing means no active Roles in Portfolio like investing for long term in Index Fund or ETF Etc. Returns Matches with the Benchmark Returns.

Active investing requires adequate and in depth knowledge of markets, instruments and most importantly, the ability to withstand losses and setbacks. 

Mutual fund schemes gives you the cheapest cost option of investing in the market as a passive investor as you get access to very highly qualified, experienced and well paid fund managers to do the active management of your funds while you remain passive. This option allows you not to take the risk of uncertainty off success, gives you time and piece of mind to focus on your core strength, your profession / trade. I would advise passive strategy through investment into MF schemes with proper asset allocation.

Active investing allows the fund manager to choose stocks and their proportion while building a portfolio in line with the objectives and directives of that scheme. Also, the changes happen keeping in mind the fundamental attributes of a stock and fund manager's views on the underlying businesses/industries

Passive management needs the fund manager to follow an index (based on the specific product in question)

Owing to the fact that the former (active management) requires research and due diligence on the securities at hand the expenses are higher than passive management

Active management strategy seems to work better in economies of developing nations where the market information is far from perfect. This leaves room for many opportunities and sweet spots in securities purchase increasing the possibility of superior returns (vs the benchmark/index)

 

All the data/information shared above are opinions/ views that solely belong to the Mutual Fund Distributors. UTI Mutual Fund (acting through UTI Trustee Company Pvt Limited) / UTI Asset Management Company) owes no responsibility/ liability whatsoever in this regards. The information contained should not be construed as forecast or promise, and the only objective of this initiative is to educate the consumers to take a more informed investment decision. Any investment decision taken based on the information provided in the content above shall be at sole risks, cost and consequences of the user.



 


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