Investing in the share market: Passive or active?

• What is Active Investing?
• Advantages and Disadvantages of Active Investment
• What is Passive Investing?
• Advantages and Disadvantages of Passive Investment
• Which One Should You Choose?
• Conclusion
• FAQ's

What is Active Investing?

Advantages and Disadvantages of Active Investment

These are the following advantages of active investing:

• Active investing gives you the flexibility to make changes as per your own judgement and changing market conditions. It can prove to be advantageous, especially when the markets go bearish.
• It gives you the freedom to invest in securities of your choice.
• Investors with sharp market skills can leverage their knowledge to maximise their returns. They don't need to settle on what markets offer them.
• Active investing and management give investors the opportunity to employ their hedging skills in order to minimise their risks.
• It allows you to offset your losses by selling underperforming securities against your tax liabilities, thus reducing your tax burden. 

Now let’s take a look at the disadvantages of active share market investment.

• Active investing strategies are based on the buying and selling mindset. This frequent buying and selling can sometimes lead to a high brokerage cost, thus nullifying whatever profits you have made so far. 
• Even though active investors have the flexibility to choose their securities, it can result in great losses if their decisions turn out to be wrong. 
• Active investments require constant monitoring of the market and making changes in the portfolio accordingly. Since it can become difficult for individual investors to hawk the market all the time, they can sometimes miss good opportunities or end up making losses on their existing investments.
• If you choose to invest in actively managed funds, the expense ratio of such funds is quite high because fund managers monitor and analyse the funds very closely.

What is Passive Investing?

Advantages and Disadvantages of Passive Investment

Here are some of the key advantages of passive share market investment:

• Passive investments are comparatively less costly because these investors do not buy or sell securities in high volume. Hence, the transaction charges associated with their trading volume are also low.
• Even if you invest in a passively managed fund, it would be less costly for you because the passively managed funds have a lower expense ratio.
• Passive investors often put their money in passively managed funds, or they try to mirror the indices some other way. Mirroring an index gives them enough diversification in their investments. 
• An adequate diversification of the portfolio also helps them mitigate risk. 
• Passive investors do not need to constantly worry about their investments as there is no pressure to outperform the market. 
• It also prevents them from having to constantly monitor the markets. Hence passive investing requires very less time and effort from the investor. 
• It can be a suitable investment choice for movie traders who are still learning the technicalities of the market.

Now let’s take a look at some factors that can be quite disadvantageous to passive investors.

• Passive investing is usually for the long haul; therefore, the returns can also only be seen in the long run. If you are following a passive investment strategy for a short-term goal, you might not see the desired results. 
• Passive investing is not very flexible. Hence you can sometimes also have negative returns on your portfolio. This can create anxiety in some investors.
• Passive investing aims at imitating the market; hence, the returns of passive investing would rarely go beyond the markets. This means limited returns in some cases. 
• It is not a very appealing investment strategy for most experienced traders and investors. They would rather prefer to actively manage their portfolio to gain maximum returns rather than wait for the market trends to help them make profits.

Which One Should You Choose?

• Investor acumen:

  Active investing requires frequent buying and selling and is thus more complex than passive investing. Hence if you have a good grip and understanding of the market, you can choose active investing strategies. However, for novice investors, passive investing may be more accurate.

• Time and dedication:

  Active investors need to keep a closer watch on the market. They also need to put time into research and analytics to chalk out their next step with constantly changing markets. If you can't put in so much time and effort, passive investing may be a better choice. 

• Investment goals:

  Passive investing is more suited to investors with long term goals. On the contrary, active investing can drive better results in the short run. 

• Investment cost:

  Frequent buying and selling in active investing requires a high investment cost. Whereas in passive investing, this cost is significantly low. 

Conclusion

FAQ's