| Definition |
Investment strategy where managers actively select securities to outperform the market. |
Investment strategy that tracks a market index or benchmark without frequent trading. |
| Goal |
Beat the market or achieve higher returns than a benchmark. |
Match the market returns by replicating an index. |
| Management Style |
Hands-on, involving research, analysis, and frequent decision-making. |
Hands-off, focusing on long-term holding of index components. |
| Cost |
Higher fees due to active research, trading, and management. |
Lower fees due to minimal trading and passive management. |
| Trading Frequency |
Frequent buying and selling to capitalize on market opportunities. |
Minimal trading, primarily for rebalancing to maintain index composition. |
| Risk |
Potentially higher risk due to concentrated bets and market timing. |
Generally lower risk due to broad diversification mirroring the index. |
| Return Potential |
Opportunity to outperform the market, but with higher variability. |
Returns closely mirror the market index performance. |
| Diversification |
Can be concentrated or diversified depending on strategy. |
Broad diversification as it includes most or all index components. |
| Time Horizon |
Can be short-term or long-term depending on the strategy. |
Typically long-term focused with buy-and-hold approach. |
| Suitability |
Suitable for investors comfortable with risk and active market participation. |
Suitable for investors seeking steady, market-matching returns with less effort. |
| Performance Consistency |
Inconsistent; many active funds underperform after fees. |
Consistent performance tracking the index. |
| Transparency |
Lower transparency; holdings and strategies may change frequently. |
High transparency; holdings mirror the public index. |
| Tax Efficiency |
Less tax-efficient due to frequent trading and capital gains. |
More tax-efficient due to lower turnover. |
| Examples |
Mutual funds managed by active portfolio managers, hedge funds. |
Index funds, Exchange Traded Funds (ETFs) tracking S&P 500, Nifty 50. |
| Investor Involvement |
Requires regular monitoring and decisions. |
Minimal involvement after initial investment. |
| Impact of Market Efficiency |
More effective in less efficient markets with pricing anomalies. |
Better suited for highly efficient markets. |
| Flexibility |
Highly flexible to adapt to market conditions. |
Less flexible; strictly follows the index composition. |
| Psychological Impact |
Can lead to emotional decision-making due to active trading. |
Encourages disciplined, long-term investment mindset. |
| Benchmark Comparison |
Performance measured against a benchmark. |
Performance is expected to mirror the benchmark. |
| Summary |
Active investing seeks to beat the market through research and trading, with higher costs and risks. |
Passive investing aims to replicate market returns with lower costs and more stability. |
Active Investing vs Passive Investing
