Active Investing
A person who regularly purchases financial instruments or other investments is considered an active investor.
Active investing with derivatives has a risk associated with it that is far greater than passive investing in mutual funds. The derivative is susceptible to both market sentiment and market risk since it lacks intrinsic value and derives all of its value from the underlying asset.
Regardless of what happens to the price of the underlying asset, supply and demand factors have the potential to cause a derivative's price and liquidity to fluctuate.
Studies from market watchdog SEBI show that 90 per cent of active retail traders lose money when trading derivative contracts, has issued repeated warnings about the surge.
In recent days, Chief Economic Advisor V. Anantha Nageswaran and Finance Minister Nirmala Sitharaman issued a warning regarding the increasing number of retail participants in the equity futures and options market.
According to Sitharaman's statement last week, this "unchecked retail surge" may result in future difficulties for the markets and household finances.
Passive Investing
A passive investor is someone who buys financial instruments like mutual fund units, stocks, and bonds and holds them for a long period of time. Buy and hold is the typical strategy of the passive investor, which gives a decent enough return over the years.
A mutual fund is one of the easiest ways to invest your money. The Nifty 50 index has given 14.2 per cent of the CAGR since 1999. But in attempts to make quick money, investors turn to the derivatives market, which is far more risky way. Some of the reasons that mutual funds are better than derivatives markets are:
1) Mutual funds combine the capital of several investors and use it to purchase a variety of securities.
2) Every mutual fund has an objective that outlines its overall strategy, investing objective, and risk profile.
3) Mutual funds provide diversified investments across numerous sectors and different kinds of securities.
4) A good way to avoid some of the difficult decision-making associated with stock investing is to invest in mutual funds.
Purchasing and holding assets with little to no portfolio turnover is known as passive investing. Buying and selling investments based on their short-term performance is known as active investing, and it aims to outperform average market returns. Although each strategy has a place in the market, different investors will find value in each.
