The difference between active and passive funds

Find out if there’s a right choice between active and passive funds.

07:38 22 December 2013

Many people wonder whether passive or active management for investment funds is better. In order to determine which method you prefer, there should be some clarification about the difference between the two methods. 

 

Active management:

• Funds are managed by a specialist, or team of specialists, who have the freedom to decide which companies to invest in, and how much.

 

• Fund managers typically use history and a lot of experience in the field to determine how to get the best return possible for the money.

 

• Managers typically use funds with more security and lower risk because many of these types of funds are pooled with other funds from investors. Funds are usually invested in FTSE100 companies. 

 

Passive management:

• All shares are purchased in the index so that the growth would theoretically be the same as the growth of the index. Some companies use tracking tools and additional software which allows companies to decide which shares to purchase so results may be better, or worse, than the actual market.

 

• Funds are mostly managed by computerised solutions. This means that the management’s costs are significantly reduced over those incurred by active management. 

 

At the end of the day, it really boils down to preferences. If you want the least expensive method, you might choose passive management. 

 

If you are looking for the potential to earn higher returns, you could research to find out which fund management groups have performed well historically, though it’s no guarantee that the trend would continue. Those who prefer a predictable result might decide to go with the passive management option. Either one will get results, which is the most important part of investing. If you still aren’t sure what type of investment method you want to try, talk with a financial professional to get advice for your goals.