Active vs Passive investing and which is better?

Active Investing

Active investing, as its name implies, takes a hands-on approach to portfolio management. The goal of active portfolio management is to beat the stock market’s average returns and take full advantage of short-term price fluctuations. It involves a much deeper analysis and the expertise to know when to buy or sell a particular stock asset. A portfolio manager usually follow qualitative and quantitative factors, then try to determine where and when that price will change.

Active investing requires confidence that whoever is managing the portfolio will know exactly the right time to buy or sell. Successful active investment management requires being right more often than wrong.

Active Investing Advantages

  • Flexibility: Active managers aren’t required to follow a specific index. They can buy those “diamond in the rough” stocks they believe they’ve found.
  • Hedging: Active managers can also hedge their bets using various techniques such as short sales or put options, and they’re able to exit specific stocks or sectors when the risks become too big. Passive managers are stuck with the stocks the index they track holds, regardless of how they are performing.

Active Investing Disadvantages

  • Very expensive: The fund management fees are higher because all that active buying and selling triggers transaction costs, not to mention that you’re paying the salaries of the analyst team researching equity picks. All those fees over decades of investing can kill returns.
  • Active risk: Active managers are free to buy any investment they think would bring high returns, which is great when the analysts are right but terrible when they’re wrong.

Passive Investing

If you’re a passive investor, you invest for the long haul. Passive investors limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest. The strategy requires a buy-and-hold mentality. That means resisting the temptation to react or anticipate the stock market’s every next move.

The prime example of a passive approach is to buy an index fund that follows one of the major indices like the NIFTY 50. Whenever these indices switch their constituents, the index funds that follow them automatically switch their holdings by selling the stock that’s leaving and buying the stock that’s becoming part of the index. When you own tiny pieces of multiple stocks in an index, you earn your returns simply by participating in the upward trajectory of corporate profits over time via the overall stock market. Successful passive investors keep their eye on the prize and ignore short-term setbacks—even sharp downturns.

Passive Investing Advantages

  • Ultra-low fees: There is no researching stocks, so cost of managing the fund is much less expensive. Passive funds simply follow the index they use as their benchmark.
  • Transparency: It’s always clear which assets are in an index fund.
  • Tax efficiency: Their buy-and-hold strategy doesn’t typically result in a massive capital gains tax for the year.

Our strategy PrudentGain: A best of both active and passive investing

  • We allocate maximum proportion to an index fund such as NIFTY 50
  • We leave a minuscule proportion to exploiting short term market fluctuations
  • Index fund keeps costs low and returns at optimal levels
  • Our hedging strategies generate extra returns but without exorbitant costs of active funds
  • Get in touch with us today and begin your investing journey with us.