Wednesday, 5 August 2015

Difference between Active Investment Strategies and Passive Investment Strategies

Active Investment Strategies
Passive Investment Strategies

Definition
Active investment strategies involve managed investment funds on which professional fund managers or research teams, who make all the investment decisions, e.g., companies to invest in or when to buy and sell different assets, on someone’s behalf. They have widespread network that helps them research different markets, sectors and help in investment decisions.
Passive investment strategies involve investment funds following a certain market, and are less expensive compared to active investment strategies. The funds are basically computerized through which one may buy all or majority of the assets in a particular market whose outcome reflects market performance
Objective
In active investment strategies managers try to choose stocks, bonds, mutual funds that seemed of monetary value and particular time of when to move in or out of markets, and basically bet on the future direction of securities and markets with options, futures, and other derivatives. Their objective is to make a profit, without accepting average market returns.
Like active investors, objective of passive investment strategies is also precisely want to make a profit, but with the acceptance of the average returns various asset classes produce.
In Passive investment strategies markets are divided into asset classes which make up a company’s portfolio.
Managed and Indexed Funds
Managed Funds are involved in active investment strategies, managed by an individual manager, co-managers, or a team of managers. They have long-term performance records that are above their rivals.
The index funds are used in passive investment strategies which are passively managed, meaning that their portfolios reflect the market index. The money involved in an index fund is inevitably invested uniformly into individual stocks or bonds according to the percentage of market index present.

Risk Factor
Managers that choose active management strategies attempt to select securities that will perform exceptionally well in the market and, so, risk betting on relatively attractive but few securities. If an active manager is wronged, they may have to bear loss.
In Passive investment strategies diversified portfolios are made which consist of number of securities from different investment categories which have been checked and selected by thorough research and have predictable risks and returns.  These securities may not provide exceptional returns but also never produce exceptional losses.
Performance
Performances of active investment strategies depend on selected handful of extremely well known money managers with exceptional past performance of active management. Yet, the odds of making the right decisions are less likely, and the fact is possible that the results achieved by those active managers in the past may be due to sheer luck.
Research shows that portfolio performance differs from one money manager to another primarily due to the asset class (es) they choose.  Markets, not managers, produce returns.
Institutions Support
Wall Street firms, banks, insurance companies, and other groups support active investment strategies.
Intention
When an investor, who adopts active strategy, invests in securities, his intention is usually earning short term benefits. They are short term profit seekers.
Monitoring and management of portfolios
Active investors monitor their portfolios of investments on ongoing/ day to day basis. They check price movements of their securities very frequently, generally many times a day.
Cost of fund management
Active fund managers undertake tiresome research in the market sectors for assessment of prospects prior to making a decision about investment. Resultantly, a fund manager charges more
Tools used in Analysis
Active fund managers use the tools of technical and quantitative analysis, e.g ratio analyses and various mathematical measures, because they are concerned with detecting and exploiting the short term fluctuation in a security.
Risk and Return
Active investment strategy has the potential for higher returns and it entails higher risk as compared to passive strategy.



Passive investment strategies are supported by the nation's universities and privately funded research centers.

The intention behind purchasing of securities by passive investor is usually the pursuit of long term appreciation.


Passive investment strategy involves limited frequent buying and selling.


If investing via a fund manager, the cost of passive fund management is lower, because the strategy is simply tracking a market, so lesser compensation is charged.

Passive fund manager usually relies on fundamental analysis of the company in which security they are intending to invest. This includes the long term strategy of the company, the product quality. The study is done to evaluate long term potential of any investment.

The return of passive investors is tied to the overall market and it is relatively less risky option as compared to active investment.