Active vs Passive Funds

Mutual funds can either be managed actively or passively:

  • Active management uses a human element (the fund managers) to buy and sell securities in an effort to outperform the market. Active managers rely on research, economic data, statistics, trends and their own judgment to decide which of the fund's securities to hold and sell.
  • Passive management is the opposite of active management. A passively managed fund is usually tied to the performance of a market index. Followers of passive management believe that markets are generally efficient, meaning that markets incorporate and reflect all relevant information, making individual stock picking futile. Because managers do not make many buying and selling decisions, the management fees for passive funds are typically lower than that of active funds.