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Difference Between Passive and Active Investing

Difference Between Passive and Active Investing
  • 26th Apr 2022 |
  • 2,853

There are two ways to manage your mutual fund portfolios: Actively and Passively. Mutual fund portfolio management refers to how the fund manager handles the underlying assets (equity, debt, gold, etc.). Handling the portfolio asset means the fund manager buying and selling the portfolio assets. However, it is important to understand the difference between active and passive investments to get a clearer insight into how the funds are managed. This will give you more clarity on the type of policy you would like to opt-in the future as per your financial goals.

In this article, you will learn what is active vs passive investment and how active and passive investments are different from each other. In addition, you will know which passive and active strategies are followed in investment, along with other details regarding active trading vs passive trading.

To understand the core difference between active and passive investment, you will need to understand the core functioning of active trading vs passive trading.

What is an Active Investment?

Active investing refers to the fund actively managed by the fund manager of the policy or plan you have invested in. In this type of investment, the fund manager has overall control and can manage the buying and selling of the portfolio assets and is highly involved in selecting stocks and bonds to be included in the portfolio. Basically, in active investing, the fund manager has greater control of the policy matters.

What is a Passive Investment?

Passive investing refers to the funds that the fund manager is passively managing. The fund manager has no role and is not involved in investment decisions. In this type of investment, the insurance company takes ownership of all the policy and plan matters and manages the strategies themselves.

Having understood the basic difference between passive and active strategies, you must now have a much deeper understanding of active vs. passive investment.

Active vs. Passive Investment- Advantages and disadvantages

Let’s look at the advantages and disadvantages of Active vs. Passive Investment to understand what will fit correctly into your investment goal.

Advantages

Active investment

  • Flexibility: Highly flexible and gives you more control of your policy.
  • Hedging: Options of hedging the best bets using different techniques.
  • Tax management: This allows you to manage your resources and thus trim your capital gains taxes.

Passive investment

  • Low fees: Service and management fees are very low.
  • Transparency: The index fund assets are mentioned.
  • Tax-efficient: The strategy used does not result in very high capital gains.

Disadvantages

Active investment

  • Very expensive: The service and management fund fees are high.
  • Active risk: Directly linked to market products

Passive investment

  • Too limited: Limited to low risk and specific index managed by the insurer.
  • Small returns: The returns are small as the money is invested in safe and low-risk funds.

Active vs Passive Investing: A Comparison

Active Investment

Passive Investment

Strategy

Fund managers are in control and manage the fund at their discretion.

The insurance company is in charge of everything.

Expense ratio

High

Medium to low

Returns

Fund managers can manage high returns

Low

Risk

Very High

Minimal to no risk

Deeper knowledge and a clear understanding of each investment type is of utmost significance to ensure proper portfolio management. With a better understanding and clarity on what active and passive investment means, you can now determine how you would want your portfolio management to take place.

Kotak e-Term Plan

Features

  • Nominal Cost
  • Multiple Plan Options
  • Flexible Payout Options
  • Critical Illness Rider
  • Tax Savings
  • Long term Coverage

Ref. No. KLI/22-23/E-BB/492

T&C

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