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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.
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.
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.
Let’s look at the advantages and disadvantages of Active vs. Passive Investment to understand what will fit correctly into your investment goal.
|
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.
- A Consumer Education Initiative series by Kotak Life
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