logo
logo
Sign in

What are Actively and Passively Managed Funds? – Differences & Challenges

avatar
Shweta22
What are Actively and Passively Managed Funds? – Differences & Challenges

Understanding the Difference Between Actively and Passively Managed Funds

In the most basic sense, an actively managed investment fund is one in which a manager or management team makes investment decisions for the scheme's money. Simply put, in this type of investing strategy, the fund manager actively makes investment decisions and works in a dynamic environment.

More often than not, you will hear the term "actively managed fund" in reference to a mutual fund. What are actively and passively managed funds in the market? Passively managed funds simply track a market index. The fund manager ensures that the asset classes are invested in the same proportion as the benchmark index in this type of investment strategy.

As a result, the performance of passively managed funds tends to mimic that of the benchmark index.

To put things into perspective, actively managed funds require a hands-on approach because the fund manager actively decides where to invest the capital. Passively managed funds, on the other hand, require a hands-off approach because they typically track a market index. Challenges in Actively and Passively Managed Funds

Apart from providing higher-than-benchmark returns, the active manager must ensure that the performance of their funds covers operating costs.

Returns on actively managed funds are reduced first by expenses related to the hiring of a professional fund manager, and then by expenses related to the buying and selling of investment securities in the fund. Let us explain with an example.

Consider an actively managed fund with management and administrative fees of 1.5% of total assets. The fund's benchmark returned 10%. Read more on: https://blog.joinfingrad.com/what-are-actively-and-passively-managed-funds/

collect
0
avatar
Shweta22
guide
Zupyak is the world’s largest content marketing community, with over 400 000 members and 3 million articles. Explore and get your content discovered.
Read more