Question

What is the difference between active and passive investing? Is an investor in a non-ETF mutual fund an active or a passive investor?

Answer 1

The main difference between active and passive management is the way in which funds are to be managed. Active management of funds/portfolio requires significant investment of time and resources in order to reach the returns targetted. Open ended mutual funds which have generally higher expense ratio are the most common example of active management.The funds manager actively manages the portfolio of the fund & in turn charges fees. Active management is preferred for aggressive investors.

                   Passive Management means that the management of funds is passive. In the context of mutual funds, it can be understood as the funds which replicate the Index. When funds are replicating the index, they are trying to generate the returns equivalent to the index. Passive management is generally prefer for the investors which prefer low expense ratio and returns almost equivalent to the index.

Investor in a Non-ETF Mutual fund is passive investor. The investor is making the investment by indirectly investing into them. The person is not taking the active decision of making investment into the fund.