When you’re looking at investment opportunities in exchange-traded funds (ETFs) or mutual funds, it’s important to consider whether the investment is an actively managed fund or a passively managed fund. The differences between the two are significant, but you can feel confident in your decision when you increase your financial knowledge on the topic. Some investors may even use both approaches to further diversify their portfolios. Here are some of the main differences to be aware of with actively and passively managed funds.
Examples Of An Actively Managed Fund
An actively managed fund depends on fund managers advocating on behalf of the investor to earn as much money as possible through buying and selling stocks. An actively managed fund’s overall goal is to outperform the market, but this can be a major challenge unless the fund manager is experienced with a solid track record of doing so. A benefit of an actively managed fund is the fund manager can make adjustments to the fund depending on market conditions to keep it in line with the overall goals. Some of the main downsides include funds not performing up to expectations and paying large fees for fund managers.
How Passively Managed Funds Perform
Passively managed funds don’t use a fund manager to make decisions. Instead, the funds are selected to follow a particular strategy or market index, and small adjustments are sometimes made to ensure the assets remain aligned with the target index. What makes passively managed funds some of the most attractive investment opportunities is the low cost associated with starting one. The fund’s performance will usually match the market indices closely and can include a wide variety of assets with a single purchase. The risk with passively managed funds is you don’t have a fund manager to make adjustments during significant market downturns. And while a passively managed fund will often outperform actively managed funds in the long-term, the chances are very low that one will ever beat the market.
Which Investment Strategy Is Right For You?
Historically, passively managed funds outperform actively managed funds by large margins. However, it has only been in recent years that more investors have chosen to diversify their portfolios with passively managed funds than actively managed funds. If you like the idea of having someone manage your fund and constantly make adjustments based on market conditions, then actively managed funds are right for you. But if you want to diversify your portfolio with a low-cost fund that typically performs well without many adjustments, then passively managed funds are the way to go.
Stock Investing Info is here to help you increase your financial knowledge regarding all types of investment opportunities. Investors often use a mix of actively and passively managed funds to diversify their portfolios until they find the strategy they feel most comfortable with. Our experts are ready to explain the details and differences between the two, so contact us to see how these strategies relate to your financial situation.