How to Invest in Active and Passive Mutual Funds

Active and Passive Mutual Funds

Mutual Funds are of many types. There is a type of mutual fund for every individual. Depending on your own investment goals you may find a few options in mutual funds. It is easy to diversify your portfolio with mutual fund investment. Many investors use a lumpsum calculator to help them know the investment amount and tenure to reach their goals basis the expected returns. However, it is also important to pay special heed to the type of fund you choose for your financial goals.

The two basic types of mutual funds are Active funds and Passive Funds.

What are Active Funds?

Active Funds are those mutual fundschemes that are actively managed by a fund manager. Here, by managed, it is meant that the fund manager researches the stocks and employs active investment strategies for the mutual fund in order to try and beat the performance of the benchmark that the fund tracks. Active mutual fundschemes therefore levy higher fees and charges, since it requires an experienced fund manager along with analysts and researchers to conduct rigorous research to find the best stocks and other securities to be invested in. This translates into a higher expense ratio for the Active funds.

Two popular modes of investment into active funds are SIP or a lumpsum investment. You can find out the returns from your investments with the help of a lumpsum calculator or an SIP calculator, based on the mode of your investments. Remember though that you need to search for the correct tool, searching for a lumpsum SIP calculator is wrong, as lumpsum and SIP are two contradictory terms. So, make sure to choose the correct tool to know the future worth of your mutual fund investment.

What are Passive funds?

Passive funds on the other hand tracks and mirrors a market benchmark index by holding the same securities and stocks as the index and in the same proportion. So, the passive funds do not require active intervention of a fund manager. For example, passive index funds, ETF or Exchange Traded Funds, and Fund of funds that invest in an ETF. The expense ratio of passive funds is characteristically low. So, these low costs compounded over time actually gives you a higher effective return. You can increase the rate of return on the lumpsum calculator to give you the result of future projection of your one-time investment.

What are Exchange Traded Funds?

An Exchange Traded Fund is a bouquet of securities that track an underlying index. An ETF investment holds investments like bonds, stocks, equities or commodities like silver, or gold bars etc. However, unlike active mutual funds, Exchange Traded funds are traded freely on the stock exchange intra-day.

You will not be able to invest through SIP in Exchange traded Funds. However, few brokerage houses offer the option to buy a certain number of units of the ETF per month, which in effect works like an SIP in ETFs, since you are systematically investing in the Exchange Traded funds each month.

Whether you are investing in active funds or passive funds, like ETF, the lumpsum calculator will help you understand how much the future value of your one-time investments would be, basis the inputs, expected rate of return and the time horizon of your investment.

Contact your mutual fund distributor or financial advisor to understand more about lumpsum calculator and ETF investment.

Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.

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