Comparison: Actively Managed Funds vs Passively Managed Funds

Howdy Wall St. Willy! Sometime ago we talked about Actively Managed Funds and Passively Managed Funds. But can you tell me some of the differences between them?

The main difference between actively managed funds and passively managed funds is their investment philosophy.

Which means that the actively managed funds believe that getting returns better than the market or beating the market is possible. So, they use research and analysis to make their investments to beat the market.

However, passively managed funds believe that beating the market is not possible, so they make their investments to mirror an index, which means that they buy the same stocks, bonds or other securities that the index that they are following buys.

How about their cost and expense ratio? Is that different too?

Yes, it is different. Actively managed funds trade frequently and hire research analysts. So, their costs and expense ratio are usually high.

On the other hand, passively managed funds trade quite infrequently and don’t need to hire research analysts. So, their costs and expense ratio are usually very low. Sometimes they could be as low as 0.05%!

Are they different in terms of income tax as well?

Yes. Due to their frequent trading, actively managed funds result in a higher income tax liability compared to passively managed funds.

Well, what asset class do they invest in?

Both actively and passively managed funds invest in stocks, bonds and other securities.

Well, what should Actively Managed Funds and Passively Managed Funds be used for? Like are their uses different?

Actively managed funds are usually good for investing in fixed income or debt, whereas passively managed funds are usually great for investing in stocks or equities.

Thank you very much for telling me about some of the differences between Actively Managed Funds and Passively Managed Funds, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

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