Mutual funds: Confused between active and passive funds? Know here (2024)

FAQs

Mutual funds: Confused between active and passive funds? Know here? ›

In general terms, active management refers to mutual funds that are actively managed by a portfolio manager. Passive management typically refers to funds that simply mirror the composition and performance of a specific index, such as the Standard & Poor's 500^® Index.

Active funds strive for higher returns and may provide better capital protection in turbulent markets but they come with higher costs and risks. Passive funds offer steady, long-term returns at lower costs but carry market-level risks.

Active Funds Fell Short of Passive Funds in 2023

While notching an improvement over 2022, slightly less than half (47%) of active strategies survived and delivered higher net-of-fees returns than their average passive counterpart.

Active investors buy and sell assets in an effort to outperform the market. Passive investors take a buy-and-hold approach, limiting the number of transactions they carry out, and typically try to match, rather than beat, the market.

Passive mutual funds consistently mirror the performance of a market index to maximise returns. The portfolio of a passive fund precisely replicates a designated market index, such as Nifty or Sensex, with the composition and proportion of investments matching the tracked index.

In general terms, active management refers to mutual funds that are actively managed by a portfolio manager. Passive management typically refers to funds that simply mirror the composition and performance of a specific index, such as the Standard & Poor's 500^® Index.

Active management requires frequent buying and selling in an effort to outperform a specific benchmark or index. Passive management replicates a specific benchmark or index in order to match its performance. Active management portfolios strive for superior returns but take greater risks and entail larger fees.

Active income, generally speaking, is generated from tasks linked to your job or career that take up time. Passive income, on the other hand, is income that you can earn with relatively minimal effort, such as renting out a property or earning money from a business without much active participation.

Active asset management focuses on outperforming a benchmark, such as the S&P 500 Index, while passive management aims to mimic the asset holdings of a particular benchmark index.

Active funds

Mutual funds following an active investment strategy aim to outperform their benchmark indices by selecting undervalued stocks or capitalising on market trends. This strategy appeals to investors who seek higher returns and are willing to navigate higher risks.

Is it better to be an active or passive investor? ›

Passive investment is less expensive, less complex, and often produces superior after-tax results over medium to long time horizons when compared to actively managed portfolios.

A passive investor rarely buys individual investments, preferring to hold an investment over a long period or purchase shares of a mutual or exchange-traded fund. These investors tend to rely on fund managers to ensure the investments held in the funds are performing and expect them to replace declining holdings.

Because active investing is generally more expensive (you need to pay research analysts and portfolio managers, as well as additional costs due to more frequent trading), many active managers fail to beat the index after accounting for expenses—consequently, passive investing has often outperformed active because of ...

Passive investing involves creating a fund portfolio that closely mirrors a market index, contrasting with active management, where a fund manager strives to outperform the market using various strategies. If you are optimistic about the markets, passive funds can give your portfolio a substantial boost.

Check your mutual fund status online

Websites of the AMCs as well as the websites of the registrars like CAMS and Karvy will assist investors in checking their fund status using the folio number. It is possible to do a one-time registration on the website and track performance.

Actively managed funds require a hands-on approach where a manager decides how to invest funds, while a passively managed fund is more hands-off and typically follows a market index. Understanding how each one works and its benefits and drawbacks can help you determine the right investment strategy for you.

Typically, passive investments are lower cost, as investors are not paying for the fund manager's expertise in choosing the investments in the fund. Active funds, on the other hand typically charge a base fee and a performance fee, to incentivise the fund manager to produce the highest possible return.

Active fund managers will have a team of analysts who often meet with management to gain a better understanding of the issuing company. Passive investment costs tend to be far lower. With actively managed funds, there is also a risk that the investment decisions made by the managers could turn out to lose money.

Q: What is the difference between active and passive real estate investment? A: Active investment is a hands-on role where you'll manage the property directly. Passive investment is a backseat approach; you'll put money into a syndication or REIT and spend much less time on day-to-day operations.