Actively vs. Passively Managed Investment Funds: Making Informed Choices
Active and passive investment funds are two broad categories of investment strategies that investors can choose from when building their portfolios. These strategies differ in terms of how they aim to generate returns and their associated costs.
Active investment funds are managed by professional portfolio managers who actively buy and sell securities (such as stocks, bonds, or other assets) within the fund with the goal of outperforming a specific benchmark or the overall market.
Professional Expertise: Actively managed funds are overseen by experienced fund managers who make decisions based on extensive research and market analysis. They aim to outperform the market by actively selecting investments that they believe will generate higher returns.
Flexibility and Adaptability: Active managers can adjust their investment strategies promptly in response to market conditions, economic trends, or changes in the company’s fundamentals. This flexibility allows them to capitalize on opportunities and mitigate risks.
Potential for Outperformance: Skilled fund managers may identify undervalued assets or emerging trends, potentially leading to higher returns compared to market benchmarks. This potential for outperformance can be enticing for clients seeking above-average gains.
Underperformance Risk: While some active managers outperform the market, there is also a risk of underperformance. The fund’s success heavily relies on the manager’s skills and judgment, which are not guaranteed.
Passive investment funds, also known as index funds or exchange-traded funds (ETFs), aim to replicate the performance of a specific market index (e.g., S&P 500, FTSE 100) rather than trying to outperform it. Instead of relying on active management decisions, passive funds simply hold the same securities in the same proportions as the index they track.
Lower Costs: Passively managed funds have lower expense ratios since they aim to replicate the performance of a specific market index rather than actively trading assets. As a result, more of the investment’s return stays with the investor.
Consistent Market Returns: Index funds aim to match the performance of the underlying index, providing investors with returns similar to the overall market performance. This approach can be especially appealing for clients seeking a more stable and predictable investment experience.
Diversification: Index funds typically hold a broad range of assets, providing investors with instant diversification across various companies and sectors. This diversification can help reduce risk compared to individual stock picking.
Lack of Customization: Passively managed funds follow predetermined investment strategies, leaving no room for customization or deviation from the index they track. As a result, investors may not be able to avoid specific assets or sectors they wish to exclude.
Which Strategy to Choose?
Both actively managed and passively managed investment funds offer unique benefits and drawbacks. Here at SN Financial Services, we believe a blended investment strategy, incorporating elements of both active and passive management is often the most suitable approach for our clients.
Our primary goal is to empower our clients with a personalised and well-informed investment approach to help achieve their financial objectives. We therefore thoroughly assess your unique financial situation, risk tolerance, long-term goals, and investment time horizon in order determine the most appropriate investment strategy for you.