Every investor looks forward to finding the investment channels and strategies that can bring maximum profit to them. While some investors are aggressive and are actively involved in the investment process, some play passively and think long-term.
Investors have two options passive investing strategy and active investing strategy for putting their money in the market. Depending on the investment goals, risk appetite, cost, transparency, tax management, market volatility, etc., one can choose between the two. However, to determine whether to go with active investment or passive investment, it is imperative to know about both substantially.
Let us know them one by one and their advantages and disadvantages.
Active investing is a strategy in which the trader is deeply involved in trading. Here, the investor aims to beat the average index returns. The trader usually has deep knowledge and market analytical skills to find which is the best time to invest. They are experts in buying and selling just at the right time.
While some traders do active investing themselves, some outsource it to experts who are professionals in managing active investments for hundreds of clients. Mutual funds and active exchange-traded funds or ETFs are the most common active investments that investors find lucrative options. Also, algorithmic options trading makes active investing more systematic.
Active investment managers study a big data pool, know about every investment, create a profitable investment portfolio, study the broader market and economic trends, and conduct quantitative and qualitative data searches. Using all these insights, the managers can efficiently buy and sell assets and register profits. They handle short-term price fluctuations and turn the same in their favor and also ensure to keep the asset allocation in line with the investment goals.
Active Investing: The Benefits
Here are some of the reasons why people invest in active investments:
The active investors are allowed to change their position and holding. They can play with cash and bonds when the market is low and prevent huge financial dent. They can also reallocate their portfolio and garner more equities when the market is growing. According to real-time market conditions, they can perform higher than the market benchmarks.
Active investors beat market indexes by using the right trading strategies like hedging, shorting stock, etc. Though these can increase the active investing costs as well as risks, if an experienced professional is handling things, then they are aware of the best techniques to benefit the investors.
Your expert investment advisor also uses active investing and trades to manage tax liabilities. Often, tax-loss harvesting is used along with passive investing, to create more opportunities.
Active Investing: Drawbacks
It is also important to know the downsides:
Though the brokerages may not levy trading fees for stocks and ETF purchases if you go for the based trading strategies, then you will have to bear the expenses. Investment in active funds means a higher expense in fees. Since this type of investment involves a lot of research, hard work, and time, actively managed funds are expensive.
Though active investors are right most of the time, if they are not, you might have to suffer huge losses. It can lead to lower portfolio performance and a substantial financial crunch.
Coming to the other investment model, passive investing is a strategy in which buying and holding assets are done with a long-term intention. Also called the hands-off approach, when you invest in security, you go through both ups and downs and have a bigger goal in mind.
Unlike active investing where the use of individual securities is higher, in passive strategies the traders use index funds and ETFs. They try to duplicate the performance of the main market indexes. Like active investing, either you can buy funds or allow the financial advisor to buy the same for you.
The investor intends to replicate the market performance and need not remain on the toes all the time for passive investing. In this strategy, there are fewer transactions and low costs.
Passive Investing: The Benefits
Here we outline the top benefits of passive investing:
Since the amount of trading and volume is low in passive investing, the individual investor needs to pay a lower cost. Also, the passively managed funds levy lesser expense ratios compared to the active funds due to the low amount of research and data needed.
Passive strategies are for the long term. Investors can diversify their portfolios and lower the risk of one investment going bad.
For a long-term investment, passive funds can fetch you higher returns.
Passive Investing: Drawbacks
Here are the drawbacks:
No quick returns
If you are looking for some excitement, then be informed that there are no quick and skyrocketing returns from passive investing.
The passive investor needs to wait and cannot derail their investment during down market conditions.
Now that you know about both of these strategies, it will become easier for you to take your pick. If you are looking for a long-term goal, then passive investing makes more sense. If you want short-term capital gains and quick returns, then active investment will sit you more. A combination approach can also work for you. Use the leading options trading app in India and experience the benefits!