Forgot your password?

Active vs passive funds

By Edited Jan 12, 2016 0 0

Active vs Passive funds

A passive fund would generally be described as trackers to an index. These are usually low cost funds because there are no fund managers for these sort of funds. An active fund has a manager who will continuously churn the  portfolio as he sees fit to maximize profits.

                        The choice of fund that you take would depend on you . If you do not have the time or the knowledge to study various funds , an active fund would be suitable for you. There are certain advantages of holding an index fund . An index fund always follows the median ie it may not be the best performing fund for a given year but it’s not going to be the worst either , the best approach would be to buy this ,forget about it and try to hold on to it forever , over time it will keep growing. It has been seen that for the majority of the time 60%-70% of the time , the active funds fail to beat the index. There is also a psychological  aspect in this , it is said that the pain of a loss in the stock market is greater than the pleasure of making a profit. If you were to buy an active fund and if it were to underperform relative to  the index , it would make you feel bad. If the the index were to perform badly you still wouldn’t feel that bad because in your mind you would tell yourself that everyone else also lost their money. In this way you would continue to hold the index and reap the benefits of long term investing.

                   However if you have the time and the interest to study on active funds , buying them would be a good approach .It is better to buy funds that have a good track record for atleast 5 years  , as this period usually encapsulates a market cycle.It isn’t enough to just see the gains that was made during a bull market ( when the markets are good ) and we should also check on how these funds contained their downside in a bear market (when markets are bad ).       

                        Fund managers also have got the flexibility to have more weightage towards a particular sector , for eg if the market is overpriced the fund manager may wish to put more money into defensive sectors such as FMCG or pharma , he may also sell some of the stocks and hold cash for sometime till the markets fall so he can again enter again.It is always better to review the active funds every quarter so that you can weed out the underperformers.




Add a new comment - No HTML
You must be logged in and verified to post a comment. Please log in or sign up to comment.

Explore InfoBarrel

Auto Business & Money Entertainment Environment Health History Home & Garden InfoBarrel University Lifestyle Sports Technology Travel & Places
© Copyright 2008 - 2016 by Hinzie Media Inc. Terms of Service Privacy Policy XML Sitemap

Follow IB Business & Money