What is a passive and active fund? What is the difference?

Before investing in mutual funds, we must first know what type of fund we are going to invest in. And how do fund managers manage funds? The methods that fund managers use to manage funds are passive funds and active funds. So, what are passive funds and active funds? Which one is better? We have an answer here.

Passive fund management or Index fund

A passive fund, or index fund, is a mutual fund that has an investment objective of earning a return as close to the index as possible. For example, today the SET Index is +5%, which means index mutual funds must be +5% or +4.9% or +5.1% approximately (get the closest), etc.

Index mutual funds are mostly divided by the index or benchmark that the fund is invested in to get a return as close as possible, such as SET, SET100, SET50, and SETHD. Investors can recognize the fund’s name. The name of the fund will tell you which index the fund uses. For example, a passive fund that uses the SET50 index as a citation index will have SET50 in the name. Moreover, investment guidelines will be in the prospectus.

What’s the good thing about index funds that don’t try to beat the market?

The answer is if we believe that market funds are effective and every share price in the market is reasonable, investment in index funds is the answer. Because if we see that every share price is appropriate and reasonable, it means it is a waste of our time to try to beat the market. It was like things in 20-baht, quality and quantity were appropriate with the price. We didn’t have to buy or do any competition in the market.

Therefore, investing in an index fund is like buying the whole stock market according to the index. The index fund will not try to choose the best stocks or avoid the worst stocks but will invest according to the market. Now let’s see the advantages and disadvantages of index funds.

advantages	disadvantages
Has the lowest risk	It must always invest in stocks
Lower fees than active funds	When there is a market downturn, index funds cannot sell out of portfolios.
the risk of stock selection is lower.	Index funds only aim to get returns close to the index.

Advantages

Index funds are the ones with the lowest risk, or, if they are risky, they will risk at the same level as the index. (Because it will invest according to the citation index and invest in the same proportion).
Index funds have lower costs or lower fees than active funds.
index fund not required fund manager in stock selection. Therefore, the risk of selecting the stock is lower.
Index funds can hold shares for a long time. So, if anyone wants to invest in the long term, an index fund would be a good choice. Because index funds only change their portfolios every six months, a year.

Disadvantages

Index funds need to invest in stocks all the time. In the market uptrend, index funds offer very good returns. But in the market downtrend, index funds also need to hold stocks all the time, resulting in lower returns according to the index.
Index funds cannot reduce or completely sell out of their portfolios as cash. Active funds will have an advantage at this point because fund managers can adjust their portfolios according to market conditions.
Index mutual funds only aim to generate returns similar to the index, so investors can’t expect to beat the market.

What’s the good thing about index funds that don’t try to beat the market?

Investors interested in investing in the stock market for the long term
Investors who want a return rate and want to handle risk at the same level as the index
person without the knowledge or a person who doesn’t have time to analyze or select each stock, or doesn’t trust fund managers. Because in reality, most mutual funds lose the market.

Active Fund

Active funds have proactive management, whereby fund managers can select investing assets to receive a return higher than the specified standard (benchmark), such as investing to get a higher rate of return than the SET Index, which can be divided into 2 types:

Top-Down Analysis is an investment analysis approach that focuses on the macro factors of the economy first and then on the sectors in, which they want to invest. Is it appropriate to invest in this situation?
Bottom-Up Analysis focuses on analyzing individual stocks first (whether they are good or bad) and then taking into account the industrial environment. Lastly, consider whether it is a good time to invest. which is the opposite of the top-down analysis.

The advantages and disadvantages of active funds are the opposite of passive funds.

Who is suitable for active funds

The answer is that it is suitable for investors who think that they must have a good fund manager that can win the market for the long term and manage the funds to achieve a good return. Active funds have more expensive fees, but investors are willing to pay because they believe in the fund manager. Therefore, we must choose the right funds and don’t forget that most mutual funds lose to the market.

In summary, both types of funds have different advantages and disadvantages. Investors must therefore choose to invest based on their investment goals, investment period, and risk tolerance and must not forget to read the prospectus before making a decision.

Article by:

Nibhapan Poonsatiansup CFP®

independent financial planner writer and lecturer.

Try to assess the risk and suitability for yourself. Every investment carries risks. One thing that we should do before investing reduces the risk as much as possible.