As the name suggests, an actively managed fund is managed by professional fund managers and research teams who actively buy and sell securities to achieve the fund’s investment objective and potentially outperform the market or a benchmark index.
For example, if a company reports strong earnings growth or receives a major business order that may positively impact its future performance, the fund manager may increase the fund’s investment in that company.
In contrast, an index fund is passively managed because it simply tracks a market index such as the Nifty 50 or Sensex.
An index fund invests in the stocks of the index in the same proportion as the index itself, with the goal of delivering returns similar to the benchmark index.
Index Funds vs Actively Managed Funds
Key Differences Between Index Funds and Actively Managed Funds
Expense Ratio
Actively managed funds generally have higher expense ratios compared to index funds because they involve active research, portfolio management, and more frequent transactions.
Investment Objective
Actively managed funds aim to outperform the benchmark index, while index funds aim to replicate the performance of the index they track.
Risk and Volatility
Actively managed funds may carry higher risk because fund managers actively make investment decisions based on market opportunities and research. Index funds generally follow a passive investment strategy.
Management Style
Actively managed funds require continuous monitoring and portfolio adjustments by fund managers, whereas index funds follow a passive investment approach with minimal changes to the portfolio.
Examples
Index Fund
The HDFC Nifty 50 Index Fund is an index fund that primarily invests in the stocks included in the Nifty 50 Index.
Actively Managed Fund
The HDFC Large Cap Fund is an example of an actively managed mutual fund where fund managers actively select and manage investments based on the fund’s objective.
Before investing, investors should understand that both index funds and actively managed funds are subject to market risks, and returns are not guaranteed.
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