Mutual funds could be actively or passively managed schemes. So, here’s a quick take on understanding the difference between the two routes of investing.
Active mutual funds usually have a dedicated portfolio manager, team, or company that actively manages the fund. The fund managers will take the day-to-day decisions on which stocks to consider as well as when to buy and sell. While relying on market analysis and research, financial forecasting, and expertise, fund managers try to get the highest returns possible for a fund. Active mutual funds constantly aim to outperform their underlying benchmark and generate high returns.
In the case of passive mutual funds, fund managers constantly map the movement of a specific market index or benchmark.
Index mutual funds and exchange-traded mutual funds (ETFs) are the two main ways of passive investing.
An index fund manager will buy and maintain the portfolio such that the composition of the fund in terms of returns remains similar to that of the index they are tracking. For example, a Nifty 50 Index fund of any mutual fund house would have the similar 50 stocks in its portfolio that are part of the benchmark Nifty 50 Index.
At the same time, a Sensex 30 fund would have the 30 Sensex stocks in its portfolio. Also, the weightage of the stocks would mimic those in the index against which the scheme or the fund is benchmarked.
An ETF is similar to a mutual fund, which holds a basket of stocks or bonds. However, unlike mutual funds, ETFs can be traded on an exchange. It can be purchased through a dematerialised (demat) account.
Lastly, always consider the time horizon and individual risk tolerance before considering investing in mutual funds.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.