Question

Explain what we mean by “active” vs. “passive” investment management? What are the pluses and minuses of each alternative for investors?

Answer 1

Active management means buying and selling frequently in order to outperform the market and it is regular restructuring of the portfolio.

Passive investment advocates that the performance of benchmarks should be replicated and the shares should be assigned in the same proportion to the the index.

Active management portfolio will always be looking for the superior returns while passive management portfolio will just be wanting to match the market rate of return.

Active management of portfolio means higher risk where passive management of portfolio will mean lower risk.

Active management of portfolio will always be demanding a higher fees from the investor whereas passive management of portfolio will demand and lower fees

Advantages of active management is that it will help in outperforming the index and generating a higher rate of return.

Advantage of passive management is that it will help in in never underperforming the market and it will always be helpful in generating a constant rate of return similar to the market and paying a lower fees having the lower risk.

Disadvantage of active management of portfolio is that it will be having higher risk and higher fees.

Disadvantage of passive management is that it will have no scenario of outperforming the index and it is very lazy in nature.