Passive Management

Posted in Finance, Accounting and Economics Terms, Total Reads: 102
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Definition: Passive Management

Passive Management is a way of investing funds only to mirror the return of the market. Here the fund manager only wants to replicate the earnings of the market. The strategy of the fund manager is to invest in index funds and then sit back to enjoy the returns of the market.

 

On the other hand, Active Management is a way of managing funds such that the fund manager tries to beat the market by indulging in repeated buying and selling of securities in various asset classes such as to have a return more than the market.

 

These are two ways in which the management of funds are classified.

 

In Passive Management the investment is in index funds, an index fund is a fund in which there are no handpicked stocks the fund has the same stocks as the index. For example a NIFTY Index fund will have the same stocks as the 50 stocks in NIFTY and hence the return would be same as of the NIFTY Index. There is no need of actively managing the fund as the intention is not to beat the market but only to have a return exactly similar to the market.


The passive management theory is based on the Efficient Market Hypothesis, which states that the stock markets always display correct prices for stocks and it is mere impossible to buy under-priced stocks and have a return of more than the market. But this theory is not right because during market crashes it is possible to look for under-priced stocks and have a return of more than the market.


Active fund managers also argue that the passive management technique lets go off the chance to invest when the markets are bleeding i.e. when it’s very cheap to buy good businesses and then enjoy a return of more than the market. But a general result over time also states that the passively managed fund have a more return that most of the actively managed funds.

 

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