What are Active Funds?
Active funds refer to investment vehicles that employ a professional fund manager or team to manage the fund’s investments actively. The manager utilises their expertise and knowledge to make wise investment decisions and build a portfolio of stocks, bonds, or other securities, with the aim of achieving a return that exceeds the market average. Active funds typically have higher fees compared to passive funds due to the costs involved with the active management.
What are the Benefits and Drawbacks of Investing in Active Funds?
The benefits of investing in active funds are:
- The potential for higher returns.
- The opportunity to take advantage of the expertise of a professional fund manager.
- Flexibility in terms of asset allocation and strategies, allowing managers to make changes based on market conditions.
However, there are also some drawbacks to investing in active funds that are worth being aware of. These are:
- Active funds tend to have higher fees than passive funds, which may eat into returns over time.
- Active fund managers may not always outperform the market.
- There is no guarantee that a fund will perform well in the future.
- There is a risk of the manager making poor investment decisions or leaving the fund, which could lead to a performance decline.
How Do Active Funds Differ from Passive Funds in Terms of Investment Strategies and Returns?
Active funds are managed by a professional fund manager who will make investment decisions based on research and their own expertise. In contrast, passive funds aim to match the performance of a certain market index, for example, the S&P 500. Passive funds do not rely on the expertise of a fund manager, and for that reason, typically have lower fees in comparison.
The returns of active funds can vary widely based on the performance of the fund manager and market conditions. On the other hand, the returns of passive funds are tied to the performance of the index the fund is matching.
What are the Key Factors to Consider When Selecting an Active Fund for Investment Purposes?
When choosing an active fund for investment purposes, there are several key factors to consider. These are as follows:
- The track record of the fund manager
- The fees associated with the fund
- The fund’s investment strategy
- The overall risk level of the fund
Before making your decision, conduct thorough research and due diligence to ensure that the fund aligns with your risk tolerance and investment goals.
What is the Performance of Actively Managed Funds During Market Downturns Compared to Passive Funds?
During a market downturn, actively managed funds can potentially provide better performances than passive funds. Active fund managers have the flexibility to make changes to the portfolio based on current market conditions, which can help with mitigating losses during a downturn. However, this isn’t always the case, and there is no guarantee that an active fund will outperform a passive fund in periods of market downturn.
What is the Active Share of a Mutual Fund and How Does It Affect Investment Performance?
The active share of a mutual fund refers to a measure of how much the fund’s portfolio differs from its benchmark index. A greater deviation from the index is indicated by a higher active share, which may lead to higher returns if the manager is able to outperform the index. However, a high active share can also cause greater risk and volatility.
Active funds are managed by professional fund managers who aim to perform the market average. While they offer more flexibility and high return potential, they also come with higher risks and fees.
