In the world of investment there are numerous options for buying securities in a single product. Most popular being mutual, segregated and exchange traded funds. The common factor here being that it is easier to buy securities at once rather than buying each security separately. In terms of costs there are two types of funds you can purchase and it’s very important to have this in mind to avoid over paying. Before deciding which product is suitable for you there are some aspects to consider in order to understand the variations.
This is when a portfolio manager chooses stocks already in the fund and then decides how much of each stock to hold. The portfolio manager also monitors the entire portfolio and makes the decision on when to sell off, add or decrease the weight of a security. Under these circumstances a portfolio manager requires administrative personnel and research analysts to help with some task because a lot of research and analysis should be carried out on a regular.
Passive investing also has the same kind of setup as active investing but rather than deciding on what securities to buy the portfolio manager simply copies an existing benchmark. A benchmark in this context can be defined as a collection of securities which funds are compared against to foresee how good they are doing. Since investing is about making and taking risks funds try to compare with other funds in the same category to see who makes more money and fast. Keep in mind comparisons are only done for returns and the risk aspect is mostly handled by looking carefully at the type of securities held by the fund or how specialized and advanced the fund is.
So the question in most of our minds up until this point is, active or passive? Well the answer is very simple! All you need to do is know how the portfolio manager operates the fund. If by any chance they intentionally pick securities because of some beliefs they have about the market, this without a doubt is active management. Whereas if the fund description goes little something like “breaking down the benchmark” then it’s definitely actively managed. You may also want to take a look at their return history. If by any chance the returns vary versus index by totally different amounts every year then definitely the fund is active.
When the name of the fund says “Index fund” then there is a good chance its passively managed. If it also exchange- traded funds “ETF” this could well be an indicator that it is a passive fund, but make sure because some ETFs could be active funds.