The age long debate still continues as to what style of investment still works – Active or Passive?
If you are planning on parking your money into an investment fund, there are two strategies you’ll often come across – either active management or passive management of funds. The same debate has raged over years to identify which is an effective option to invest your money. If your investments are inclined towards Unit trusts or open ended investment companies, then the option of actively managed funds will heavily outweigh passive funds.
Typically, actively managed funds are handled by the fund managers or research teams who take all the investment decisions on your behalf as to which companies to invest in. They have immense experience and knowledge about different sectors and the nature of market, and often meet with their respective corporate’s with whom they have tie-ups, before making any investment decision. An actively managed fund provides much higher returns than a market can, provided your fund manager makes the right calls.
How is active fund management different from passive?
Passive investments charge way less in comparison to active Investments since they simply track the market. These funds are basically functioned by computer and purchase all the assets in a particular market to fetch you with returns that reflect how the market is performing. The fundamental difference is that the investors’ money is invested basis the composition of the index on which the fund is based. For example, if the index fund tracks Nifty 50, it will invest in Nifty 50 stocks, followed by the same allocation pattern as the index.
Which one to select?
To opt between active and passive investments majorly rely on the type of investments one chooses. If you choose the right actively managed fund, you could possibly make much more money than you would, otherwise. However, with so many options of actively managed funds out there, knowing who will perform better in the near future can be a tricky task. Some areas of investments are more suitable to active investments, for instance, property funds or commercial property investment can pay high returns through rentals.
A comparison between the two kinds of funds in the mid-cap and small-cap space is not possible since there are no ETFs or even index funds based on small-caps. Investors with a greater risk appetite can choose actively managed mid or small cap funds.
Ultimately, making a choice between the two assets is what an investor has to decide – and with any kind of investment, diversification is the key. Do not blindly follow any strategy; be open-minded and wise when it comes to your investments.