It’s important to know the difference between actively and passively managed funds before starting investing in a mutual fund.
Actively managed fund means it’s a mutual fund scheme in which the fund manager continuously monitors and manages the portfolio by applying his professional judgement and analytical research. The main objective of the fund manager is to generate maximum returns for their clients by outperforming the benchmark index.
In contrast, passively managed fund managers simply follow the market index. The fund manager simply replicates the scheme’s benchmark index in exactly the same proportion in order to give the same return that the index offers. As it’s like a copy of the overall index, the fund managers do not require to use their judgement or discretion to decide as to which stocks to buy/sell/hold. They simply replicate the scheme’s benchmark index in exactly the same proportion. They do not try to outperform the benchmark index.
Best examples of closed-end mutual funds are index funds and exchange traded funds.
Difference between actively vs passively managed mutual funds
Here are the differences between passively and actively managed mutual funds;
| Particulars | Actively managed mutual fund | Passively managed mutual fund |
| Investment strategy | Requires an experienced manager and a team to make decisions. | As you need to follow a market index, you don’t require a fund manager or team to be actively available to make buy or sell decisions. The fund manager can manage other funds to reduce costs. |
| Return | Fund manager attempts to beat the market index by timing the investment accurately. | As it replicates the index, it matches to the performance of the index. |
| Expenses ratio | Expenses ratio is significantly higher as you require to conduct sector, economic and company research to develop investment strategy. You need highly qualified professionals, therefore it comes with a high cost to manage. | Compared to an actively managed fund, the expenses ratio is lower in a passively managed fund. |
Active funds are managed by professional fund managers. They use various technical analysis and fundamental analysis tools to do in depth research.
They constantly look for shares that can outperform the index. Therefore, actively managed funds have higher chances of outperforming the market index and passively managed funds.
