scorecardresearchActive vs Passive investing: What suits you most?

Active vs Passive investing: What suits you most?

Updated: 12 Feb 2023, 10:11 AM IST

You spend so much time earning and saving your money. Why not spend a similar number of hours deciding the investment style that will take you a long way in deciding when and how to invest your money?

Decide between active and passive investing.

Decide between active and passive investing.

You want to put your money in the market but are not sure if you must deep dive into it straight ahead or take a detour. Both are good enough depending on how much knowledge you have about finances. Considering how you will buy and sell stocks listed in the stock, it is clear that you would be looking to beat the Sensex while investing – the difference being that you will be beating the Sensex returns directly in the former while passive investing will enable you to earn returns in sync with the market.

Investing actively in the market

What comes to your mind when you think of active investing? Learn fundamental analysis, list some good stocks based on their fundamentals, and then decide your investment horizon and the money that you want to put in. Once you have decided to invest, all you have to do is to check the market movement and decide whether to hold or sell your stocks.

If you are anticipating an immediate rise and then a prolonged dip, it may as well be better to sell off your stocks when the market rises and use the money to buy stocks of fundamentally strong companies.

Some stocks take time to break out of their comfort zone, which means that you must wait to earn returns that will be many times more than what you had invested. Overall, active investing is when you decide to trade frequently with the intent to exceed the average return of an index.

Viral Bhatt, Founder, Money Mantra says, “The first thing you need is adequate patience. Investing often involves a long-term horizon and it's important to be patient and not make hasty decisions based on short-term market fluctuations. Next in line is diversification. Diversifying your portfolio by investing in different types of assets and industries can help manage risk and increase your chances of success.”

Active investing typically requires both investors and traders to understand advanced market analysis and expertise to decide when to buy or sell stocks.

Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners says, “Investment without knowledge is dangerous; many do it based on tips thinking it is privileged information. Mostly it turns out to be self-serving and investors get left in the lurch. Best for such people to invest through managed funds or seek professional advice.”

Passively investing in the market

Many people prefer passive investing owing to the fewer complications involved. For this, they invest via small cases and mutual funds. This type of investing is getting increasingly popular. Passive investors invest with a long-term goal in mind.

This explains why they do not trade frequently in stocks but invest through portfolios that include a collection of stocks depending on their market capitalization. In passive investing, you must choose a stock or an investment and then watch out for the ups and downs with long-term goals such as retirement.

Active investing focuses on individual securities, while passive strategies typically involve buying shares in index funds or exchange-traded funds (ETFs) designed to track the performance of major market indices or outperform with diligent and timely decisions.

What suits you most – Active or Passive?

Which investing style suits you best depends on how you view your finances in the long run. There is no straight answer to how you must invest. You may either invest actively or through a passive route or both. This also means that active and passive investment strategies need not be mutually exclusive and, therefore, may complement each other depending on your investment style, availability of money and risk-taking attitude.

Things to know about active and passive investments
First Published: 12 Feb 2023, 10:11 AM IST