Savings and investments are a must for everyone. As inflation leads to price rise of essential commodities, your balance should also be in line with the increased expenses to maintain headroom for making financial provisions. Therefore, savings are not enough and investments have become necessary. With investing you have the option to either be an active investor or a passive investor. There are even funds that can be categorized as active or passive which follow respective investment strategies.
Passive funds invest in an index. Their portfolio will reflect the components of the index proportionally. The idea being that it is not possible to beat the market consistently for very long. So, it is better to invest in the index and just relax. It would save you money and time. The gains made by the broader market would reflect in the relevant index. To put it in another way, it is a lazy man’s strategy to earn money from the stock market.
Passive investment management expects investor to earn in line with the market average. The idea is to not take additional risk and instead just be in line with the index that your passive fund tracks. There is no fund manager risk involved and the buy and hold approach ensures minimal costs.
Active funds, on the other hand, try to beat the index. The fund manager or investor actively puts in efforts to pick stocks which are likely to outperform the market. Some stocks always perform better than others. So, if the fund manager or investor manages to pick stocks that can deliver super normal returns, the scheme might outperform the broader market.
There are definitely advantages to taking the active approach to investing. Firstly, as active investors tend to try to beat the market, when they succeed it may translate to higher than average returns. Of course, it comes with its own set of costs – higher fees and the possibility of underperformance to the market as the fund manager or investor may go wrong. Although, taking this approach to investing usually requires a high level of confidence when making investment decisions, and would typically involve higher risk, which should be taken into account.
In conclusion, in the Indian scenario, actively managed investments still have a scope especially in the midcap and small space. In the end, while fund selection it all comes down to risk, reward and what you want to get out of your investing experience.