Benefits of investing in passive funds

Portfolios of mutual funds may be actively or passively managed. When we talk about portfolio management or wealth management, we’re talking about how the fund manager buys and sells the underlying assets (stock, debt, gold, etc.).

A mutual fund that is actively managed means the fund manager is more involved in the decision-making process and actively monitors when and which stocks and bonds are added to and removed from the portfolio. Fund management tends not to control the movement of the underlying assets in passively managed funds.

Although this is the primary distinction between active and passive investment strategies, let’s examine further differences to understand them better.

What is an Actively Managed Portfolio?

Similar to an equity fund, a dedicated fund manager selects the stocks that will be added to and removed from an equity fund based on the performance of the bigger markets and economies as well as the individual performance of the stocks.

The fund manager must also decide if the concentration of the current stocks will stay the same or whether the amount of money invested in particular stocks has to be increased or decreased.

In other words, the fund manager greatly influences an equity fund’s success. While we used an equity fund as an example, the situation is the same for all other active management fund categories.

What is a Passively Managed Portfolio?

ETFs, or exchange-traded funds, are funds that follow the passive management strategy. The fund’s sole function in ETFs is to map an index’s movement.

The index determines what is added to and removed from the index, not fund managers. Hence, the fund tracks index movement directly.

Passive funds are less expensive than actively managed funds since they are passively managed.

The benefit of investing in passive funds is that they are cheaper. They have far lower expense ratios than active funds. The ETF expense ratio is restricted by SEBI laws and cannot exceed 1%.

Active funds vs. passive funds – which one should you pick?

Check out the key differences between active and passive funds so you can pick one per your preference. 

Particulars Active Funds Passive Funds
Strategy The fund management actively and arbitrarily alters the composition of the fund. The fund manager just mimics the behaviour of the benchmark indices.
Returns The fund manager’s goal is to outperform the benchmark. The fund manager’s goal is to mimic the benchmark returns.
Expense Ratio Depending on the equity/debt orientation, 0.08 to 2.25%. Tends to be up to 1%.


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