Active v/s Passive Investing
Greetings! Let’s start our discussion straight away.
First of all Let’s Know, What is Active Investing and What is Passive Investing ??
Active Investing :- This is type of Investing in which either you or a fund manager invests your money, with a purpose to beat the market Indices depending upon your fund selection. Ex- In a traffic in your city, you try to overtake the traffic, for that you need to take either some different ways or you have to accelerate and deccelerate with respect to traffic.
Passive Investing :- In this type of investing, you do not try to beat the stock market index rather you just copy it by buying the stock indices. It does not include any active fund selection. Ex- In the same example, suppose someone was just following his/her lane and wait for traffic to clear then goes forward .
Which One is better?
Well, as you got the definitions now. So, what do you think which one is better ?? The answer is not Active or Passive, the answer is, it depends on individual to individual.
As, someone might need to go fast (that’s why that individual is taking shortcuts to clear traffic fast as one can have avery important task pending or some other important reason. In Investing, it is like that the goal is quite large and Amount that individual can invest is also fix, in that case individual visits to an expert.
Expert knows after seeing the historical returns, that they need to take extra risk (of volatility) to reach that goal which they can’t reach if they chose passive way. The expert do some Reasearch on Fund Managers and depending upon the style of Investing of Fund Manager and risk involved , the expert suggests them to take some X fund.
Let’s take two Scenarios :-
Now, There are two scenarios:-
(a) Returns earned by the fund X can help individual reaching their goal
(b) Returns are not sufficient to reach their goal
This is perfect example to understand which one is better?? Now, it depends whether you want to reach somewhere very quickly as you might not have the time, for that you take some extra risks (of overtaking in traffic and Changing lanes or Taking shortcut ways presuming that nobody else will take that).
Now, You go to the group that teaches how to time the market or takes fund to time the market, Which I think can be rewarding in short term but chances of you being outperforming the Index are very less but people still try that. For a retail, who does even know properly about the products involved into the process, it becomes quite impossible. Even it is difficult for someone who knows stock market in and our.(Probabilitistic outcomes always win in most of cases).
Conclusion:-
Both types of investing are good but Which one is better? is not the right question to ask, rather it is Which one is better for me? Remember that the key to financial success is patience, discipline, and continuous learning. Do not hesitate to meet Financial advisor, in case you think you need one.
Happy investing from meriSIP.com team.
