Question

What is the difference between an Actively managed mutual fund and a Passively managed mutual fund?

Which has offered better returns to investors historically?

Are there any settings where the other type has tended to offer better returns to investors?

Answer 1

Actively Managed mutual funds

These are the type of mutual funds where fund manager tries to gain abnormal returns by outperforming the market compared to a specific benchmark. Active Management's strategies include lots of market research, forecasting and the expertise of manager managing it.

Managers know the market very closely. They know about shifts in the economy, economic trend and estimates sytematic and unsystematic risk factors. They conclude on when will be the best time to purchase and sell a particular stock. There is additional market risks in actively managed mutual funds. Also these funds charge higher fees because of additional risk and management expertise.

Passively Managed mutual funds

These funds replicate a specific index. They track that index very closely. They use same securities as on index and same weights as on index. The return here is the normal return that you would earn on that index. There are no expertise of management involved in order to decide which security to buy or sell, when to buy or sell and about the risk factors. Its a reactive strategy, therefore managers charge lower fees as compared to actively managed funds.

Historically, active has offered better returns to investors

As such it is getting difficult to trust an active manager because of high risk involved.