The aim of an actively managed fund is to beat the return from a particular market index or another defined benchmark.

Investment company Vanguard says fund managers who use an active investment approach aim to either outperform a given equity or bond market, often represented by an index, or to achieve a specific investment objective.

Vanguard notes that managers can also adjust their portfolios to minimise potential losses. For example, they can avoid individual shares or bonds, sectors, industries, or even countries which they believe may underperform over a certain period.

Active investing vs passive investing: Differences and benefits

Active managers use different styles of investing. Vanguard explains that value managers seek to buy companies whose shares are currently selling for less than their net asset value (their total value after any debt and other liabilities have been deducted), or where they believe future earnings potential has been underestimated.

Growth managers, meanwhile, look for companies which have exceptional potential to grow, and to increase their share price over the longer-term.

Passive investment is the opposite of active management. According to Vanguard, passive managers generally believe it is difficult to out-think the market, so they try to match the performance of the market (or their chosen sector) as a whole.

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They tend to do this by closely following or tracking an investment index, such as the FTSE 100 Index of the UK’s biggest 100 companies.

That’s why passive investments are often called index funds or tracker funds. These have a simple, precise objective: to match a specific index, rather than try to beat it.

Passive investing also keeps management costs low. There is no need to research companies or bonds, and transaction costs are reduced because securities are bought and sold much less frequently.