Active vs Passive Investing: Learn More About Two Sides Of Same Coin

Active vs Passive Investing: Learn More About Two Sides Of Same Coin

A frequent buyer of stocks or other investments is known as an active investor. Rather than making one-time investments, a passive investor would much rather buy parts or units of mutual funds or exchange-traded funds and hold them for a long time.

G R MukeshUpdated: Friday, July 05, 2024, 01:30 PM IST
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A frequent buyer of stocks or other investments is known as an active investor. These investors look for and purchase investments that are profitable or that they predict will be profitable. They sell any stocks they own that don't meet their criteria of investing

Rather than making one-time investments, a passive investor would much rather buy parts or units of mutual funds or exchange-traded funds and hold them for a long time. These investors typically expect fund managers to replenish declining holdings and rely on them to make sure the investments held in the funds are performing.

What is 'Active Investing'?

Active investing involves a hands-on approach and the need for someone to manage a portfolio, whether that person is professionally managing a portfolio or managing their own. The goal of active money management is to maximize short-term price fluctuations and outperform average stock market returns.

It requires in-depth research and knowledge of when to change course and exit a specific stock, bond, or asset. Typically, a portfolio manager is in charge of a group of analysts who examine both quantitative and qualitative data before using predetermined metrics and criteria to determine whether or not to buy or sell.

What is 'Passive Investing'?

Investing for the long term is what passive investors do. Investing as a passive investor can be very economical because they restrict the amount of buying and selling that goes into their portfolios.

Choosing stocks or funds and restraining yourself from reacting to or speculating on the next move in the stock market are key components of the buy-and-hold approach.

Investing in an index fund that tracks a major index, such as the 'Nifty 50' or the 'Sensex', is a prime example of a passive approach. The index funds that track these indices automatically modify their holdings whenever these indices change their composition, purchasing the new stock that joins the index and selling the outgoing stock. Because it ensures that the stock will become a core holding in thousands of important funds, a company's inclusion in one of the major indices is a significant milestone.

Active vs Passive investing

Though active and passive investing are merely two sides of the same coin, evidence suggests that passive investing beats active investing. This may be oversimplifying something much more complex.

The lower fees of passive funds continue to make them the industry leader, but some investors are willing to pay a higher fee for the knowledge and experience of an active manager to help them navigate the unpredictable and volatile market.

(Investment are subject to market risk; please read all scheme related documents carefully.)

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