Difference Between Active Funds vs Passive Funds

Choosing the appropriate form of investing can be overwhelming, especially considering the many available options. One such consideration in the investment world pits active funds vs passive funds.

Though the intention is to grow an investor's wealth, they tread different paths to achieve this goal. In this article, we'll explain what active and passive funds are, how they work, and which funds might work for you depending on your financial goals.

An actively managed portfolio remains focused on its goals and tries to deliver higher returns. It is dependent on the fund manager's decisions. Managers aim to beat a benchmark index. They decide when to buy or sell based on market conditions. This requires skill, research, and good judgment.

Managers closely monitor the market and adjust portfolios to reduce risks and increase profits. Frequent buying and selling makes the portfolio riskier and unstable. However, if done well, it can lead to higher rewards.

How Do Actively Managed Funds Work?

Knowing the workings of the actively managed funds enables us to monitor and fetch investment returns. Check out the points given below to learn about its workings:

• The actively managed fund works by how the fund manager selects and designs the portfolio of the funds. Thus, funds are controlled by a fund manager.
• A fund manager charges a fee from the investors for services rendered by him, such as managing and the operational costs of the funds.
• The fund management fees are called Management Fees and are included in the expense ratio (percentage of the fund's assets under management).
• The expense ratio reduces the fund's returns to investors. This ratio also varies depending on the fund's strategy and asset class.

A passively managed portfolio, or index fund, aims to offer stable, long-term growth. The performance of the index is followed in a passively managed portfolio. It uses a "buy and hold" strategy, reducing trading and lowering investor costs.

Passive funds don't require a fund manager to manage the funds. They are simple, often in the form of ETFs, and maintain the same securities as their index in identical quantities. Rules set by SEBI keep such portfolios aligned with their index, which makes them non-manipulable and straightforward.

How Does a Passively Managed Fund Work?

Passively managed funds work similarly to the actively managed fund. However, they differ in certain aspects, and knowing them can help you make a wise investment decision. Get to know how it works by checking the points below:

• The passively managed fund works by how the fund manager selects and designs the portfolio of the funds. However, he won't fully control the fund.
• A fund manager charges a minimal fee from the investors for services rendered by him, such as managing and the operational costs of the funds.
• The fund management fees are called Management Fees and are included in the expense ratio (percentage of the fund's assets under management).
• The expense ratio does not reduce the fund's returns to investors. It also varies depending on the fund's strategy and asset class.

Active and passive funds cater to different investment needs. Professionally managed active funds seek to outperform the market and bring better returns. However, passive funds prefer simplicity and low cost with steady, long-term growth based on tracking a market index.

Ultimately, the choice depends on your objectives, risk capacity, and time horizon, so decisions are made with better knowledge.

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