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Definition: Active Management
Active management is a concept that signifies a type of strategy for management of Mutual funds. In active management basically a manager or a group of managers make a decision related to specific investments instead of just following some index, the motive of active management is to beat the benchmark index.
The other form of investment is Passive management, in which we basically we invest in funds which follow the benchmark index directly. But in Active management, the decisions with respect to investing in what products and the time line are all decided by a manager. Basically the managers don’t try to beat the market in short term, but stick to fundamental strategies and aim at beating the benchmark in the long term. They do not follow the efficient market hypothesis and hence believe that they can profit from markets through correct strategies.
The active manager seeks to detect and then exploit the short-term trends in a security. This often involves doing various types of analyses like quantitative, technical analyses which includes ratio analysis, stock chart analysis, also some measures like mathematical measures that involves understanding of the nature of company and also about the trading patterns of various securities of the fund. Also understanding of news and other market factors. Active managers are more risk averse as compared to passive managers because they are concerned about mitigating the short term risk about also want to exploit the short term gains.
Analysis for the previous year suggests that about 68% of net fund sales are invested in passively managed funds and only 32% is invested in actively managed funds. Regardless of the statistics, many active managers have posted returns on fund well above the benchmark.