In recent years more and more people are beginning to focus on managing their assets and funds, especially as more people are beginning to invest in cryptocurrencies, stocks, and shares. Due to this, more people will be in need of fund management.
Fund management as a term covers any kind of system that maintains the value of an entity, applying to both tangible assets and intangible assets, examples being equipment and real estate for the former and intellectual property for the latter. It’s vital for a fund manager to look at all possibilities and methods to keep on top of their job.
Investors have turned to create two main investment strategies that can be used to generate returns on their investment accounts. These are often called active management and passive management and both have fantastic advantages as well as disadvantages that an investor must keep an eye out for when deciding the best method for them. So which method should you pick? Read on to find out.
Passive Management
Passive portfolio management can also be known as index fund management, as a passive portfolio is crafted and actioned to mirror the returns of a specific benchmark or market index as exactly as it can. Each stock listed on the index is weighted. The main purpose of a passive portfolio is to make a return that is similar to the chosen index.
Passive fund managers only look to match the index that they are tracking, meaning that they don’t make any active decisions themselves. Passively managed funds tend to perform well when the markets rise and poorly when they fall as they are simply matching other indexes.
They aren’t risky, so this means that it is unlikely you will see any large rises or falls in your portfolio. Passive management is safer, but not always the best option if you want to maximize your money. So why pick passive over active management? Why would you want an index fund over a mutual fund? The main reason would be safety.
Passively managed portfolios tend to be cheaper and safer, as they will follow the index they are calibrated to. This is appealing to investors because it can allow access to the markets that these funds mirror at a lower price compared to active funds. This allows an investor to pay less and make a consistent return. In turn, this offers lower risk to the investor.
To understand the difference between passive and active management methods on fund management click here. This guide outlines index funds versus mutual funds and the benefits and drawbacks of each of them. As mentioned, index funds are passively managed, which you can put against mutual funds, which can be either passively or actively managed. From there you can decide the approach that best suits your needs.
Active Management
In the media today it’s clear that more people are getting interested in learning stock market trading. The rise in financial information found online has been embraced by the public who are doing their research to ensure a safe investment. From there, those who spend the time learning about how to invest properly and take advantage of the risks and rewards of trading have been rewarded with moving toward active fund management
An active fund manager picks and chooses investments, trying to best the performance of the fund’s stated benchmark or index. The risk with active management comes in the risks that come with all investments. There is no guarantee that even the most talented fund manager will make the right investment that will outperform the index on a regular basis.
Investments are merely at the mercy of the market conditions and so can fall or rise in value. These market conditions can include world events, economic growth, technological development, and other factors beyond any one person’s control. Some promising shares can drop one year and bounce back the next, so the best fund manager needs to be able to navigate market volatility.
If you’re looking to go down the active management route, look into your manager’s history in the market before you commit. Take a look at a manager’s long-term track record across many market conditions. This can be useful; however, this past performance isn’t always a solid indicator of their future performance.
Active management funds can be an investment in themselves in the figurative sense. Investors in actively managed funds are billed a higher annual charge to get the expertise and understanding of the fund manager, usually between 0.6% and 1.5% though sometimes more, depending on the type of portfolio they want to run.
However, the flip side is that, if you choose wisely, you will have a reliable source of advice and expertise. When you decide, you have to decide whether you can risk the extra amount you have to pay, as your return will go up and down and will never be decisive.
Race For Returns
Both of these methods of fund managers are very different, coming from totally different approaches to the market. However, both seek the same thing: high returns on investment. The thing is, both approaches can throw up all sorts of unexpected surprises, from massive peaks in return to worrying troughs of loss.
In a season where an active manager fails to pick the best stocks and can’t deliver high returns, a passive manager can bring a consistent match against the market. On the flip side, when an active manager selects the best stocks to run with it can lead to huge gains that a passive manager simply misses out on.
Which route you choose to take is entirely up to what your investment goals are and what levels of risk you are willing to take. There is a huge amount of risk involved in the world of trading, but if you are able to face the risk and able to pick your way through the dangers, there are many rewards that can eventually be reaped with patience and luck.
