If I’m investing regularly, am I better off with active or passive funds?
I have £8,000 to invest in a pension and intend to follow it up with a monthly sum of £100 over the next 20 years. Would I be better off investing in active or passive funds?
Arguably, there is no right answer and there are advantages to both approaches, so a blend of the two may work for you.
One thing to consider is the cost of each type of investing. Passive funds are cheaper than active funds and therefore the impact of charges on the growth of a portfolio is reduced. Over the long term, the compound effect of even slightly lower charges can make a big difference to your investment result.
However, having a good fund manager oversee your investments can be invaluable. Active funds have the potential to outperform markets and reduce volatility, which passive funds cannot do as they simply track a market up and down.
Mark Hibbit is a chartered financial planner at Sovereign Independent Financial Advisors.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.