- Active investing means that experts design and manage your portfolio based on their insights.
- In contrast, experts do not intervene in passive investing.
- Funds are often used as an example: Depending on the option and personal goals, the selection process of securities differs.
- Nevertheless, dealing with active funds today is easier than ever thanks to digitalization.
Anyone wanting to invest money has more possibilities than ever before. But before you set about choosing the right portfolio, you should ask yourself whether you prefer active or passive investing. Both types have their advantages and disadvantages. The crucial question is what objectives you are pursuing.
Huge Range Of Investment Options
Low interest rates in industrialized nations mean that ever more people are choosing to invest their savings instead of depositing them in a savings account. In addition, private investors have an abundance of app solutions and trading platforms available to them, making it easier than ever before to try their luck on the stock exchange.
However, the range of investments is huge, so the question is: What is the easiest way to “beat the market” and compile a portfolio that yields attractive returns alongside a measurable risk ratio?
Investing In Funds
One possibility is funds — which applies particularly regarding diversification — or spreading risk. Instead of individual equities or bonds, you can invest your money in a fund that best corresponds to your own investment targets. Depending on its strategy and orientation, the fund invests the deposited sums in different stocks or in assets like real estate. Since a fund combines the invested sums of many investors, it has greater financial power than an individual investor and can diversify much more broadly. First, though, there’s an important question to answer: active or passive investing?
What Are Passively Managed Funds?
Passive funds have become much more popular over the last few years, with the number almost quadrupling between 2007 and 2015 (only in German). Passive investing means that the fund tracks a market index, such as the Swiss SMI share index or the German DAX. The fund buys equities in this index and replicates it. The performance of the fund should therefore perfectly match that of the index, meaning the fund managers do not actively intervene. Only the weighting of the companies in the fund is adjusted to match the index at regular intervals.
The best-known examples of passive funds are Exchange Traded Funds (ETFs), which are now available for all manner of indices, investment categories, and markets. The advantage of these funds are often the fees: Because they are not managed actively, the cost for management is usually a bit lower and easier to break down.
What Is Active Investing?
Active funds have a management team that tracks the performance of the markets and the companies closely and analyses them continuously. The securities are selected by the management team, which chooses companies and investments that offer the greatest potential in the eyes of the team. Investments for which weaker performance is predicted are regularly swapped out for more attractive ones.
Active vs. Passive Funds: What Is the Difference?
Opinions differ on the question of whether actively or passively managed funds are better. A well-managed active fund aims to beat its benchmark index, whereby the crucial thing is not only that a higher yield can often be achieved in the event of price gains, but also that losses can be limited when there are setbacks in the markets.
Critics of active funds complain that the better returns are usually cancelled out by the higher management fees. In reality — as with so many things — the truth lies somewhere in between, as demonstrated by a major study (only in German) by the German fund association BVI on the performance of actively managed funds in 2020.
According to the study, active funds performed better on average than their benchmark indices, but there were differences here, too. The big winners were special equity funds that invested in themed investments or in niche markets, where the excess returns were sometimes over 5 percent. Ultimately, these markets are more prone to greater fluctuations, which good fund managers know how to exploit. Meanwhile, broadly based, globally oriented funds were on average close to or even below the benchmark indices.
Investing In Active Or Passive Funds: What Now?
Both options, active as well as passive investing, have their benefits and disadvantages. Anyone who is happy to follow the cycles of the market and wishes to participate in the long-term growth of broader indices is probably well served by a selection of large ETFs. Here, the price argument can beat the potentially weaker yields compared to a similarly positioned actively managed fund.
However, those who are interested in topics for the future, themed investments, or niche markets, who want to express their personal convictions through their investments, or who are pursuing specific financial goals are likely to be happier with an active fund. The use of digital investment offerings with active portfolio management often involves lower fees than traditional, non-digital investment management mandates, meaning that an actively managed investment solution can pay off even for smaller amounts.
Sounds interesting? With volt by Vontobel, you can participate in the development of various investment themes as well as alternative investments such as gold and cryptocurrencies.
Risks of investing in financial markets
Investments in special topics on the international financial markets are associated with risks. The price, value and return of an investment, particularly in a special theme and across borders, depend, among other things, on economic developments, the global attention given to the theme in the international financial markets and the price of the underlying securities.
