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Active versus Passive fund managers

Active vs. Passive fund managers:

Passive fund managers adopt a long term buy and hold strategy. Usually, stocks are purchased so that the portfolio’s returns will track those of an index over a period of time. Because of this goal of keeping a track on the index, this approach is also called indexing. The purpose of an indexed portfolio is not to beat the target index but to match its performance.

Active fund manager on the other hand attempts to outperform a passive benchmark portfolio on a risk adjusted basis. A benchmark portfolio is a passive portfolio whose average characteristics including factors like beta, dividend yield, industry weighting and firm size match the risk return objectives of the client. When deciding to whether to follow an active of a passive investment strategy, the investor must assess the trade-off between the low cost but less exciting alternative of indexing versus the higher cost but potentially more lucrative alternative of active management.

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