Mutual fund risk and return: The fund manager manages your money in the mutual fund scheme in two ways, active or passive.
Active vs Passive mutual funds: If you do not want to take the risk associated with investing in the stock market directly, then investing in mutual fund schemes is a better option. The good thing about investing in mutual funds is that a dedicated fund manager manages the investor’s money. In this, the fund manager decides how much to invest the investor’s money in which asset class (Equity, Gold, Debt, Realty). The fund manager manages your money in a mutual fund scheme, active or passive, in two ways. Now it is important to understand here what is the difference between these two categories of Active Funds and Passive Funds and where the investor can expect higher returns. Also what are the risk factors in them.
Active vs Passive funds: What is the difference between them
Manish P. Hinger, CEO of Wealth Management Company Fintoo says that active funds are such funds, where the fund manager actively manages the fund. In these funds, the fund manager tries to get better returns from the market by making quick decisions on buying, selling or rebalancing the portfolio. This means that in actively managed funds, the role of fund manager is very high. At the same time, when we talk about passive funds, the fund manager does not have much role in them. It shows only one index and does not take any active decisions.
Let’s understand it like this; Equity Funds, Debt Funds, Hybrid Funds are actively managed funds. For example, in equity funds, the fund manager will decide which stocks to include in the portfolio, when to remove or how many shares to buy. On the other hand, talking about passive funds, it can be understood with Exchange Traded Funds (ETFs) or Index Funds. The fund’s performance in ETFs fluctuates up and down depending on the movement in the index. In this, the fund manager does not have the right to make any changes.
Active vs Passive funds: Where is more risk and more return
Manish P. Hinger says that the expansion ratio of active funds is high. They are also expected to get higher returns. At the same time, the risk is also high in active funds. Active Funds Since they are actively managed by the fund manager, they have the potential to outperform the benchmark index. On the other hand, the expense ratio of passive funds is very low. Hence, the risk and returns are also lower in these as compared to active funds.
Active vs Passive funds: Which is better to invest
Manish Hinger says, Investor whether to invest in Equity Funds or Passive Funds, it depends on his risk appetite. If the investor has a high risk appetite, then he can choose active funds. In this, he always expects to get higher returns than the benchmark index. At the same time, for investors who want better returns in tax risk, passive funds are a better option.
