What is the difference between active and passive funds?

You may have heard the terms active and passive with regard to investment funds, but what exactly do they mean and how can they impact your investing?

Actively managed investment funds are run by professional fund managers or investment teams who make all the investment decisions, such as which companies to invest in or when to buy and sell different assets, on your behalf. They have extensive access to research in different markets and sectors and often meet with companies to analyse and assess their prospects before making a decision to invest. Passively managed investment funds cost less in charges because they simply track a market, and are essentially run by computer to buy all of the assets in a particular market, or the majority, to give you a return that reflects how the market is performing.

The aim with active management is to deliver a return that is superior to the market as a whole or, for funds with more conservative investment strategies, to protect capital and lose less value if markets fall. An actively managed fund can offer you the potential for much higher returns than a market provides if your fund manager makes the right calls.

It also means that you have somebody tactically managing your money, so when a particular sector looks like it might be on the up, or one region starts to suffer, the fund manager can move your money accordingly to expose you to this growth or shield you from potential losses.

For the privilege of getting an expert active fund manager, you normally have to pay higher fees than you would with a passive investment fund, which can therefore impact your returns.