Saturday, May 3, 2014

Investing: Choosing a “Passive” Rather than an “Active” Fund Can Save You Money

If you are an investor and are keen to save money while you’re making money, you might consider buying a “passive” or “tracker” fund rather than a traditional fund. Typically, buying a passive fund is much cheaper than buying traditional funds, since there is no need to put out money for a professional to manage your investments.

We’ve nothing against professional fund managers, but numerous comparison studies have been done in recent years and many of these have suggested that large numbers of investment pros have simply failed to beat the average return from the markets in which they specialise. Some critics have even gone so far as to contend that random selection would have been just as successful, not to mention cheaper, than hiring an investment expert to handle your money. We wouldn’t go that far, but the point is well taken.

Passive funds carry fees too of course, but they are often significantly lower than that incurred by active funds. To give an example, a tracker fund might charge .25 percent, while an active fund might charge 1.7 percent or more.

But let’s back up a bit, for the benefit of those who might be unfamiliar with active versus passive funds.

What are active and passive funds?
“Active fund” simply refers to actively managed investment funds, which, as the name implies, are run by a professional fund manager or investment research team. These people make all of the investment decisions on the investor’s behalf. Presumably they have extensive access to research in different markets, above and beyond the information you could dig up yourself. They may meet with the companies’ principals so they can assess their prospects before making any investment decisions.

The whole point about paying an investment manager is to get a return that is superior to normal market returns. Indeed, actively managed funds may have the potential for much higher returns than average. In addition, if you have a competent professional carefully tracking the market and strategically managing your funds – babysitting your money, as it were – that person can move the funds around to maximise gains or shield you from possible losses. That’s how it works in theory anyway, and sometimes the extra cost for investment management is money well spent. But as noted above, many investment pros have failed to beat the market, bringing into question the necessity of paying for this extra service.

Passive investment funds do nothing more than track a market – hence the name “tracker funds” – and as a consequence they charge far less than actively managed funds. For the most part they are run by a computer, which purchases all or the majority of the assets in a particular market in order to give you a return which reflects that market’s performance.

And of course there’s a trade-off: you don’t have that extra “human touch.” A computer can only do so much. On the other hand, you don’t have that extra fee either. It’s totally up to you; like most things, choosing a specific type of investment fund involves a trade-off of some sort.

Of course this is not to be construed as investment advice in any way, shape or form, and when considering any type of investment you should always perform due diligence. If you have doubts, it is a good idea to consult with a qualified attorney or – yes – an investment advisor. If you need a little help paying their fees, check with Professionals do have their place in the investment world and it’s usually a good idea to avoid making any significant decisions about your money without consulting a qualified person. Our point is that there may be some things you really can do yourself (or mostly do yourself), for cheaper. Just do your research, and don’t be afraid to ask for help.

For more information about tracker funds, see

Related Posts Plugin for WordPress, Blogger...