Posted in Finance, Accounting and Economics Terms, Total Reads: 506
Definition: Active Investing
There are two types of fund investments – active and passive fund managements. Passive funds try to earn benchmark rate of return such as SENSEX rate of return or any other benchmark. Active investing tries to beat the market by actively looking for overvalued / undervalued stocks.
While passive investors believe that it is not possible to beat the market and that markets incorporate all information leaving any scope for abnormal returns. Active investors look for opportunities to earn abnormal return called alpha (return above benchmark) and believe that it is possible to outperform the market. Also, such funds charge higher fees for better returns whereas in passive funds, the return is always less than the benchmark due to transactions cost involved.
Investors investing in active management are doing so as to utilize the skills of the investment manager, their belief that markets are not efficient and that there is some form of inefficiency in the market, and investing in investments that have less correlation with the market so as to gain portfolio diversification.