In a world where apps allure investors with features like live option chain data and predictive algorithms to get them to invest in high-risk instruments, some investors remain firm in their footing with relatively safer instruments. One such instrument is mutual funds.
Mutual funds are considered diverse for reasons that extend beyond allowing investors to invest in stocks and other securities in one go. They’re also diverse in how they are managed. The management of the funds can fall under either of two categories: active or passive.
A difference between the two lies in the presence or absence of a fund manager. Actively managed mutual funds have fund managers. Conversely, passively managed funds, like the Nifty stock market index funds, don’t.
Beyond this, other metrics can be used to compare the two types of mutual funds.
1. Cost:
Both management and brokerage fees constitute the additional cost of trading of mutual funds. Investors who invest in mutual funds that require fund managers, are required to pay such.
Interestingly, passively managed funds don’t demand management fees, and investors may even be exempt from brokerage charges if they trade using an app like mStock. Furthermore, passive funds can have lower capital requirements and higher tax efficiency than actively managed funds.
2. Performance:
A benefit of investing in actively managed funds is the higher probability of outperforming the market. This is possible because fund managers review the securities they hold and adjust them accordingly.
Passive funds rarely outperform the market, as they replicate the performance of an underlying index without the supervision of fund managers. However, that may also mean that passive funds are more likely to give consistent returns because they follow an index.
3. Risk:
Risk and rewards are proportional in the stock market. Active funds may have higher risk due to the fund manager’s decisions. Investment decisions may sometimes be influenced by bias and the manager’s lack of skills, which can sabotage the growth of the investment portfolio. Fund managers may deviate from their stated trading strategy.
On the other hand, passive funds have lower risk since they track the broader market. Nonetheless, it’s important to look up the historical performance of passive funds on apps like mStock because all passive funds have varying risks.
4. Flexibility:
Actively managed funds offer more flexibility to adapt to changing market conditions. The weightage of securities can be altered in active funds. Meanwhile, passive funds maintain the proportion of the index being tracked. Furthermore, a single active fund can allow investment across different sectors, which may not be the case with passive funds that track sectoral indices.
5. Availability:
There are typically more actively managed fund options available across various asset classes. This is why more investors prefer to invest in SIP of actively managed funds.
Conversely, securities are limited to what’s available on indices in the case of passively managed funds.
The Bottom Line:
There’s no obvious superior option between the two types of funds. Some investors may prefer the potential for outperformance offered by active management, while others may favour the cost-effectiveness of passive index funds. No matter the choice, each trade can be fruitful if carried out from a trustable platform like mStock.