What’s the difference between active and passive funds?

Posted by TEBI on August 17, 2023

What’s the difference between active and passive funds?



In this latest video in our Getting Started series for first-time investors, JONATHAN HOLLOW takes us through the differences between active and passive funds, and explains how you can benefit from taking a passive approach to investing.



 A fund helps you invest in hundreds or more likely thousands of businesses at the same time, and you’re only investing a small amount of your money in each of those businesses. Active funds are run by humans. They involve lots of research, and the research is aiming to help the active fund manager outperform the market average. So get you a higher return than the average of the market that you’re investing in.

Passive funds, by contrast, are run according to a rule, and the rule is trying to replicate the exact performance of the market that you are investing in. Now, what do I mean by a market? It could be all small companies or all large companies based in Europe.

Now the implication of this rule, there’s two great things that follow from it. The first is you pay a lot lower fees because with a passive fund, you’re not paying for a lot of research, discussion, and debate about what to invest in. And the second thing is you will always get the average market return for the market that you’re investing in.

There’s a lot more information about the difference between active and passive funds. In the book by Robin Powell and myself called How to Fund the Life You Want, we think that passive funds are vastly superior to active funds.




JONATHAN HOLLOW worked for the UK Government’s Money and Pensions Service and is a writer and commentator on consumer education and protection. He is the co-author, with Robin Powell, of the award-winning book How to Fund the Life You Want, which is published by Bloomsbury.



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It’s not essential nowadays to seek professional financial advice before you start to invest, but it is definitely a good idea to do so. We also recommend that everyone has a financial plan.

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