In fund investment, a difference is made between actively and passively managed funds.
Actively vs. passively managed funds
When you invest in actively-managed funds, you actively participate in asset allocation. You select individual securities, regularly review performance and make changes if you so choose.
Passively-managed funds, also known as index funds, provide minimal opportunities for participation, and are primarily market-led. Passive funds like ETFs (exchange traded funds) simply follow various market index rates.
For example, the rates of an ETF which follows the Swiss Market Index (SMI) will automatically adjust in keeping with that index. In this case the investor would be betting on the market performance of the 20 largest listed Swiss companies, as indicated by the SMI.
Can anyone beat the market?
The dilemma: Numerous studies have shown that the vast majority of active fund managers have not been able to beat the market over the long-term. Future stock market developments are too complex and unpredictable to accurately forecast.
Notable Cost Differences
Actively-managed funds are a fair bit more expensive than passively-managed funds, which does not help make them any more attractive. Although the costs of actively managed funds have sunk in recent years, they are still notably higher than the costs of index funds.
Example of stocks from major Swiss companies: Actively-managed funds typically have basic costs equal to 1.5% of invested assets. Passive ETFs based on Swiss stocks have basic costs of just 0.4%.
Rule of thumb: passive beats active
Actively-managed funds may be the way to go if you want to invest in new markets with low liquidity.
Otherwise, you will almost always more from passively-managed funds like ETFs, thanks to their low fees and their steady performance.
Whether you go with actively-managed or passively-managed funds, working with an affordable online broker can help you save a lot of money.
The moneyland.ch team