ARTICLES

In 2020, India witnessed a huge growth in passive investment. While a decade ago, the assets under passively managed funds were only $1 billion, in 2020, it stood at $24 billion. The number of assets also increased under passively managed funds from 26 to 86 products. 

While investors around the world were tilted towards passive investments for a long time, Indian investors are now getting the interest to explore passive investment products as well. 

So, if you are wondering which way to go, whether to invest actively or explore the passive investment options, here is a brief idea about both and how they differ from each other. 

Active Investment

It is a type of investment where an investor takes an active part in managing his or her portfolio. The investor must participate in the stock market daily to make the most out of the short-term fluctuations. The main motto behind actively managing the portfolio is to beat the standardized returns in the market. It involves deep analysis of multiple assets, financial instruments, Then proper asset allocation and reallocation whenever the market changes to optimize the profits. 

Diversified mutual funds are active investments as the fund managers are involved actively in the entire process of choosing the stocks according to the fund's objective to generate good returns. 

Passive Investment 

In Passive investment, most investors buy and hold the assets. They wait for the appreciation in price in the long term and resist themselves from participating in the short-term market movements. This requires minimal monitoring of the portfolio. Once you analyze and pick the instruments, then you need to hold them until the price reaches your anticipated price. Passively managed funds mainly invest in index funds and try to match the returns of the underlying index. 

A Passive mutual fund is a fund that tracks the performance of the underlying benchmark. The fund’s objective is to match the benchmark performance by exactly duplicating the portfolio in the same proportion and not generating an alpha. Hence, there are no active investment decisions taken by the fund managers here. A good example of passive investment is investing in Index Funds. They have a lower expense ratio as there is no direct involvement of any fund manager.

Both active and passive investing can be short and long-term. 

Difference between Active and Passive Investment 

Active investors try to beat the market returns and earn higher, while on the other hand, passive investors want to match the returns of the indices.

Active investing requires continuous monitoring of the portfolio, while passive investment doesn’t need you to stare at the computer or mobile screen all the time. 

Active investment is a  technique where you need to continuously buy and sell to make the most out of the market. In passive investment, you just buy the assets and wait for the price to go up. 

Active investment involves a higher transaction cost as there are multiple transactions that need to be done. On the other hand, the transaction costs are lower in the case of passive investment. 

So, both active and passive investments have their own pros and cons. It is mainly dependent on which type of investor you are or what type of investment you are looking for. 

Disclaimer: Investment in securities and other investment products is subject to market risks; read all the related terms and documents carefully before investing.