Active or Passive Funds

The goal is to achieve balanced returns

However, it’s important to remember that the value of investments can fall as well as rise, and there’s a chance you could get back less than you put in.

Fund performance is usually judged by comparing it against a benchmark or index.

The benchmark is the performance standard. It varies by fund type and could be based on a broad market index such as the FTSE All-share; or asset specific, such as focusing on the aggregate performance of bonds; or segment-specific, for example focusing on the overall performance of companies within a specific sector, such as financial services.

Funds are generally divided into two types

Active funds

Active funds typically have one goal - to outperform a benchmark.

Active funds aim to outperform their benchmark by relying on a fund manager making individual investment choices.

Active funds have fund managers.

Active funds have fund managers who use their expertise and large amounts of research to decide which investments the fund will hold. They adjust the fund’s holdings on an ongoing basis, in response to performance and changes in market conditions.

Fund managers are paid to manage the fund, even if the fund does not succeed in performing better than its benchmark.

Costs of Active Funds

If you invest in an active fund you can expect to pay ongoing fees and charges ranging from around 0.65% to over 1% each year of your total investment in the fund.

Passive funds

A passive fund typically aims to match the performance of its benchmark.

The fund is designed to follow the performance of its benchmark, rising and falling in line with the market. Passive funds attempt to do this by:

Costs of Passive Funds

If you invest in a passive fund you can expect to pay ongoing fees and charges as low as 0.07% of your total investment in the fund.

Funds facts

As funds are usually a diversified investment, they’re often less risky than holding individual stocks and shares.

According to The Investment Association, the vast majority of funds are actively managed.¹

Annual charges are higher for active funds than they are for passive funds.

Which to choose?

You don’t have to choose between active or passive funds; you might want to consider investing in both types of funds as a path towards diversifying your portfolio. Before you invest in a fund make sure you fully understand the fees involved and seek professional advice if you are unsure.