Question

As an analyst, would you advise investors to invest in active or passive managed funds during COVID-19 pandemic stock market crisis? Provide detailed arguments in support of your recommendations. Also, explain what are the advantages and disadvantages of investing in active versus passive managed funds? (Marks=20)

Answer 1

A passively managed fund generally follows the market trend as they are the index funds and don't have any fund manager or management team to make investment decision whereas in an active fund they have fund managers and a management team who make investment decisions on the corpus amount to beat the market return.

The active funds generally perform well in a bear market as the manager decides quickly whether to buy, hold, or sell whereas the passive funds are profitable in bull markets as they move along with the market.

So during COVID 19, it is recommendable to invest in active managed funds.

The advantages of active funds are they want to outperform the market returns so they perform better than the passive funds. The fund managers also use a hedging strategy in active funds and use tax management strategies.

But the risk is higher in Active funds in comparison to passive funds. Passive funds are more transparent as they follow an index and have low fees than active funds because the number of buying and selling is more in case of active funds.