Active vs Index (Passive) Investing

Index Investing is a passive way of investing . Having a bunch of stocks in portfolio exactly mirroring a stock in an index is a passive way of investing. This can be done by purchasing stocks mirroring an index and tracking the weight and readjusting the portfolio whenever the constituents or weightage in the index changes. Better is to buy an Index fund. This ensures that you get returns close to index.

Example if you bought an index fund of sensex when sensex was at 10,000 , it would have appreciated 70% when sensex is around 17,000. ( Returns would be exactly similar to the index minus tracking error , of a fund or an investor).

If someone believes that actively choosing stocks from the wide range of stocks available, invests in them then it is active investing.

In India most equity funds are actively managed funds. The index funds generally involves a lesser cost. Actively managed funds have managed to beat indices (on an avg.) many a times, excepting 2005-07 period.

Investing in either of the type of funds should be made by an investor after understanding the nature of products clearly.It's also not a bad idea to diversify your investments between active and passive funds.

1 comment:

FinWin said...

I would like to add my views on Index Funds (ETF kind).

Pro's: Investing in Index funds is good for a person who doesn't have time to identify good companies, value picks etc. and as such is best suited for small retail investors. Since he is taking exposure to basket of stocks underlying 'the benchmark Index' fund has replicated. A case in point would be Satyam, When the stock went bust it didn't really have a huge impact on the index fund and eventually was out of the index due to drop in Market Cap. Had an investor taken direct exposure to Satyam he would have been badly hit. Another advantage is passive funds overall cost effectiveness is much better than active fund.
Liquidity is provided through listing on exchanges.

Con's: I have found liquidity to be very low and thus high price fluctuation in traded index funds.

Overall IMHO Index ETF is one of the best ways for getting direct exposure to equity for retail investors / new investor.


Simple Indian Food - Feel @home ( Best veg food blog )

" A Ship is safe when it is in Harbour, but the ship was not built for that"


These are just opinions/ ideas exchanged. No one can claim us responsible for any investment failures /losses based on the ideas expressed here.

Feel free to mail your queries/ comments to