Active vs Passive mutual funds: All you need to know
If you are confused by personal finance terms, jargon and calculations, here’s a series to simplify and deconstruct these for you. In the 24th part of this series, Riju Mehta explains the difference between active and passive investing in mutual f...
Here’s how active and passive mutual funds differ in terms of management, risk, cost and transparency
When it comes to investing in general, you can either be proactive and involved in the assets you pick and manage for your investment portfolio, or you can be laidback and go with the flow, not bothering too much about shuffling and changes. This difference in attitudes is what comes into play when you are investing in mutual funds, as the funds are managed either actively or passively. Here’s how they differ in terms of management, risk, cost and transparency.
Difference between active & passive mutual funds Actively managed funds These funds are handled by professional managers, who play an active role in choosing and changing the securities in the portfolio. This is done in tandem with the market performance, changes in company fundamentals and other macro-economic factors. These require specialised skills for analysing, interpreting and predicting market movements and data. The fund managers aim to outperform the market benchmark and this active involvement, research and expertise translate to higher fund management fee.
Passively managed funds As the name suggests, these funds do not require any active involvement of managers as they follow a given market index and mirror its movements. Since the securities are held in the same proportion as the index, these cannot be bought and sold at will, but only to correspond with the changes in the index. This hands-off approach does not require much monitoring or specialised skills and, hence, the fund management fee of such funds is much lower than that of active funds.
