Lower cost investing
One of the key things you’ll want to think about
when you’re investing in funds is whether to go for ‘actively managed’ funds
or ‘passively managed’ funds.
Both types of fund are run by a professional fund
manager – the key difference is in how much they are involved. In an
actively managed fund, the fund manager makes choices about how and where
the fund invests, aiming to beat a performance benchmark or ‘market’.
Passively managed funds, often called ‘tracker
funds’ simply aim to track a benchmark or an index, such as the FTSE100,
rather than trying to outperform this level by making specific investment
Why choose passive management?
Management fees for passive funds are generally
lower, even when their performance is similar to an actively managed fund.
This is because they do not have the same costs for the fund manager or team
of analysts to carry out investment analysis.
Your investment will align with the market
(i.e.FTSE100) which you couldn’t do yourself without individually purchasing
each company within the market.
The downside is the fund can’t make use of
opportunities that may arise in the market. You’ll need to be happy with the
returns that tracking the index delivers.
Why choose active management?
In an actively managed fund, the fund manager
makes decisions based on market trends, the state of the economy and company
performance as well as political and other current affairs factors. They aim
to beat the performance of the benchmark for the fund by changing when and
where they invest.
The most obvious downside apart from higher
management fees is that the fund manager may get it wrong. But if you pick
the right fund, you could get back more than by investing in a tracker fund.
It’s also worth remembering that some sectors are better suited to active
rather than passive management, for example, property. Active managers may
also come into their own in more specialised areas such as technology,
healthcare or emerging markets.
You can read more about the pros and cons of both
approaches in our Smart Investor article on choosing between active and passive funds and get the lowdown
on the active vs. passive debate in this video from Will Hobbs, Head of Equity