Active Funds vs Passive Funds

When it comes to investing, it can feel overwhelming especially when choosing which fund you want to invest in. You, as an investor, will need to decide whether you're going to invest in an active fund or a passive fund. Let me break these down for you.



Active Funds are actively managed by fund managers, whose daily job is to decide which underlying investments they should buy, sell or hold. The main benefit of investing in this type of fund is knowing that the fund manager will quickly adapt the underlying investments to any changes which might affect the fund's performance. The fund managers also aim to beat the market - meaning that attempt to get higher returns than the average return of major stock markets. To invest in an actively managed funds, you will pay more fees - which will consists of management and administration fees and sometimes even an initial fee. 

Passive funds on the other hand, track an index. An index can be compared to a scoreboard for the stock market - where it tracks the performance of a group of companies. For example, the S&P 500 index tracks the largest 500 companies in America. The FTSE 100 tracks the top 100 companies on the UK stock market. Hence, a passive funds aims to match one of these indexes - hence the fund would never be able to beat the market as it is only matching it. However, you usually incur less fees when investing in a passive fund due to less active management.

Many Long-term investors start their investment journey with passive funds - Low cost and simple. However, you should always keep in mind that a fund manager is also paid based on the performance of the fund. So naturally, they will always try their best to beat the market and get the best returns - it's a win-win!








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