One of the key decisions investors face when selecting a mutual fund is choosing the investment strategy that best aligns with their goals. They often question whether to opt for active funds or passive mutual funds because this decision can significantly impact their investment experience, including potential returns, risk levels, and overall cost.
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| Axis Nifty 500 Index Fund | — | Invest Now | Equity: Flexi Cap | 0.10% |
| Axis Nifty Midcap 50 Index Fund | +46.03% | Invest Now | Equity: Mid Cap | 0.28% |
Although both active and passive mutual funds have become popular investing choices, their management and investment approaches vary.
Here are the key differences:
What are active and passive mutual funds?
Active mutual funds are managed by fund managers who make decisions about which stocks or bonds to buy, sell, or hold, while passive funds simply follow a specific market index, like the S&P 500.
The goal of active mutual funds is to pick the best investments that will outperform the overall market. In contrast, passive funds buy the same stocks in the same proportions as the index they track.
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1. Cost: Active mutual funds have higher fees because of the involvement of experts constantly analysing the market standards. These fees cover the costs of research, analysis, and frequent trading.
In contrast, passive mutual funds have lower fees because they track the same index and require less management and research.
2. Risk: Active mutual funds carry higher risk compared to passive mutual funds because they rely on fund managers’ decisions and market timing.
Passive mutual funds track the broader market and follow a set strategy, which typically results in lower risk.
3. Return: There is potential for higher returns in active mutual funds, as fund managers aim to make strategic investment decisions, especially if they make successful picks and accurately time the market.
Investors in passive mutual funds may receive steady and predictable returns.
4. Tax Efficiency: Active mutual funds are less tax-efficient due to the frequent trading and capital gains distributions.
Passive mutual funds tend to be more tax-efficient due to the low turnover and less frequent trading.
5. Suitability: Passive mutual funds are best suited for investors seeking lower fees, less risk, and consistent returns that match the performance of the market.
Active mutual funds are best for investors who believe in the ability of fund managers to outperform the market and are willing to assume greater risk and pay higher fees for that potential.
6. Monitoring: In active mutual funds, investors need to monitor the fund more closely, as changes in management or strategy may impact returns.
Passive mutual funds require much less monitoring, as the fund tracks an index and doesn’t involve active decision-making.
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(Edited by : Shoma Bhattacharjee)
