Passive vs. Active Investing: Which Is Best? (2024)

FAQs

Which is better passive or active investing? ›

For example, when the market is volatile or the economy is weakening, active managers may outperform more often than when it is not. Conversely, when specific securities within the market are moving in unison or equity valuations are more uniform, passive strategies may be the better way to go.

Some of the key benefits of passive investing are: Ultra-low fees: No one picks stocks, so oversight is much less expensive. Passive funds simply follow the index they use as their benchmark. Transparency: It's always clear which assets are in an index fund.

Nature: Active funds are more dynamic and flexible, as they can adapt to changing market conditions and opportunities. Passive funds are more static and rigid, as they follow a predetermined strategy and do not deviate from the index.

From 2000 to 2009, active outperformed passive nine out of 10 times. During the 1990s, passive outperformed active five out of 10 times. And over the course of the past 35 years, active outperformed 17 times while passive outperformed 18 times. We've seen that the cyclical nature of active vs.

Either way, a passive income gives you extra security. And if you're worried about being able to save enough of your earnings to meet your retirement goals, building wealth through passive income is a strategy that might appeal to you, too.

Critics of passive investing say funds that simply track an index will always underperform the market when costs are taken into account. In contrast, active managers can potentially deliver market-beating returns by carefully choosing the stocks they hold.

Key takeaways

If you don't have time to research active funds, or feel comfortable choosing between them, passive funds may be a better choice. They're a low-cost way to invest in individual sectors or regions without having to select active funds or individual stocks. But it doesn't have to be an either-or choice.

The low fees, transparency, tax efficiency, and buy-and-hold nature of passive funds deeply align with the goals of most long-term investors. These advantages allow more investor capital to work toward building returns rather than being eroded by costs over decades.

From the investor's perspective, active funds typically require less effort as fund managers handle investment decisions. Investors delegate decision-making to managers, periodically reviewing fund performance.

What are the cons of active investing? ›

Only one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2022. But success rates vary across categories. Long-term success rates were generally higher among bond, real estate, and foreign-stock funds, where active management may hold the upper hand.

Lower Risk: Passive investing can lower risk, because you're investing in a broad mix of asset classes and industries, as opposed to relying on the performance of individual stock.

Active fund returns against peer index funds and ETFs is a better comparison. About three-fourths of active large caps beat top-performing BSE 100 ETFs or Nifty 50 index funds/ETFs in 2023. Similarly, all active ELSS funds surpassed the lone tax-saver index fund's performance last year.

The average investor may not have a very good chance of beating the market. Regular investors may be able to achieve better risk-adjusted returns by focusing on losing less. Consider using low-cost platforms, creating a portfolio with a purpose, and beware of headline risk.

Passive investors hold assets long term, which means paying less in taxes. Lower Risk: Passive investing can lower risk, because you're investing in a broad mix of asset classes and industries, as opposed to relying on the performance of individual stock.