In the past few years, people have become lax about the way they invest. The strategy of choice for not only Indian investors but also investors worldwide has been to replicate market returns instead of trying to set a new precedent. This approach is essentially what passive investing represents. Many investment researchers have also concluded that active investing is not a guaranteed path to success for small investors, as well as passive also not a guaranteed one, as it performs of its own criteria. While it is true that actively managed assets offer a diversified portfolio, even for large investors, passive investment options have proven to be fruitful. Both styles, however, come with their own benefits and limitations, and the key of active vs passive, lies in understanding which aligns best with your goals and personality as an investor.
In order to learn the differences first we have to learn what each of them even mean. You can also talk to an expert here for better clarity before choosing an investment strategy.
What is Active Management?
In active management, a fund manager or a team of experts makes informed investment decisions with one goal in mind: to outperform a benchmark index. A benchmark index serves as a standard for comparing the performance of an investment — such as a mutual fund, stock, or portfolio — against the broader market. The professional fund manager analyzes market trends, company performance, and economic data to identify the best opportunities based on their interpretation of all the information available.
Example: Let’s take the HDFC Flexi Cap Fund as an example. It has a team of experts who choose which companies to invest in — like picking the best vegetables in the market from the rotten ones and putting them in a basket. They study the ins and outs of the market and use all that information to measure their performance against a list called a benchmark index.
- Ability to modify course quickly: When a market starts to move upward or downward, the portfolio manager can react very quickly and buy or sell investments to adjust course, similar to taking a detour when you know there will be a traffic jam ahead.
- Ability to safeguard investments during bad times: When the market is declining, the portfolio manager can move investments to relatively safer places, similar to finding shelter when it begins to rain.
- Ability to potentially earn more than average: When a portfolio manager is thoughtful and makes good decisions, there is potential for the portfolio to earn higher returns than the market average, similar to winning a race because you decided to take a new route.
Active Investing Cons:
- Research-oriented: It takes a lot of time and effort to manage. Unless you are an experienced investor, it can be very difficult and is not beginner-friendly. But if you have means to do it, an expert fund manager with at least a decade of experience can help you stay afloat. Get guidance from experienced professionals to manage such investments effectively.
- Dependent on the skill of the investor: If a portfolio manager makes poor investment decisions or speculates incorrectly, returns may suffer or underperform compared to other options. It takes an experienced mutual fund distributor in Vijayawada to manage such investments effectively. Always choose experienced professionals, as this method carries high risk and high reward potential.
- Involves emotional or rapid decision-making: Beginner investors can react too quickly to market news and sometimes make uninformed decisions. As investors we understand why you may feel that way – which is why we always act as a bridge between market and investors. Think of us like interpreters and market as an ever changing language.
What is Passive Investment?
Passive management means copying how a large group of companies, called a market index (like the Nifty 50 or S&P 500), performs. Instead of trying to beat the market, the goal is to match it.
Think of it like this: if the market is like driving, active investors are like drivers who speed through traffic trying to get ahead, while passive investors are cautious drivers who just want to reach their destination safely and steadily.
Example: A Nippon India Nifty 50 Index Fund is a simple example of a passive investment. It puts your money into the same 50 companies that are part of the Nifty 50 index, in the same amounts. This means when the Nifty 50 goes up or down, your investment usually moves in the same direction.
Advantages of Passive Investing:
- Lower fees and costs compared to actively managed funds.
- Transparent and simple. Investors always know what’s in the fund.
- Historically reliable returns that align with overall market growth.
Drawbacks:
- Limited flexibility which means it cannot quickly adapt to sudden market changes.
- Will always match the market, never outperform it.
- May not protect investors during sharp market declines.
Active vs Passive: Which One is Best for the Long Term?
Just like the glass shoe only fits Cinderella, there’s also an investment method among Active vs Passive that suits your needs. There isn’t one method that fits everyone — for that to happen, magic would need to exist. Unfortunately, reality is boring, so no magic here. All you can do now is to take time, talk to an expert, and use the information we’ve provided to find the investment method that matches your goals.
If you’re a long-term investor, passive investing is usually a better choice because it offers low costs, low maintenance, and less emotional stress. Historical evidence also shows that it provides stability over time. It’s fueled by the power of compounding, which means that as long as you invest regularly, your investments can grow steadily and smoothly.
Active investing can be rewarding if you have access to skilled fund managers along with deep market knowledge. It offers the chance to outperform the market during favorable conditions and adjust quickly during downturns to protect investments. However, it comes with higher costs and greater risks, and over time, many active funds have struggled to beat passive ones after accounting for fees.
Still unsure which strategy suits your financial goals? Get personalized investment advice today.