There has always been a big debate between active investing and passive investing, a debate of being the hare or the tortoise, let’s understand them in detail.
Active Investments: Active investments as the name suggests is an active way of investing, it focusses on beating the stocks market’s average returns and taking the full advantage of the market fluctuations. Active investment can be considered to be more about timing the market backed by strong research so as to generate maximum returns. For example, if you’re an active investor, your goal can be to achieve better returns than the Nifty 50.
Passive Investments: Passive investments can also be called as a buy and hold strategy, basically this type of investments limits the amount of buying and selling in their portfolio thereby making it a cost-effective way of investing.
Pros and cons of Active investing: Active Investments are managed by Portfolio managers, in most of the cases they can produce good returns, there is flexibility in investments and managers can hedge their bets and exit when required. The disadvantage is they are risky and too expensive.
Pros and cons of Passive investing:
Passive funds, also known as passive index funds, are structured to replicate a given index in the composition of securities and are meant to match the performance of the index that they track, no more and no less. That means they get all the upside when a particular index is rising. But — take note — it also means they get all the downside when that index falls.
As the name implies, passive funds don’t have human managers making decisions about buying and selling. With no managers to pay, passive funds generally have very low fees.
Discussing both the topic in detail we cannot say that one should only go for passive investments or only active investments approach. As a self instructed investor, it totally depends on you to have your ideal investment philosophy based on your risk appetite and capital.
One can also think of using both, mixing both the style of investment approach for your portfolio.