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14 Jan 2021

Active vs Passive Investing: How Should You Invest?

Nisha Ramesh

Since the 1970s, a significant debate has divided the investment world into two – Active vs Passive investing.

Active investing is like betting on which team will win this seasons IPL, while passive investing is like owning a stake in the IPL itself.

Let me explain,

While betting on a single team in IPL, what would someone do?

Analyse the team’s strength and weakness, gauge its performance against its rivals, and make a calculated bet on which team would grab the trophy this season. 

If you own the IPL, you know that not every team will win, but you need not care. Because you know that the IPL will definitely take place and profits are bound to follow. 

Active and Passive investments work similarly.

Let us begin by understanding the meaning of the two terms before we get deeper into the debate. 

What Is Active Investing?

As the name suggests, active investing involves a dynamic and hands-on approach to money management. It aims to beat the market’s average returns and take full advantage of the short term price volatility. 

Just like betting on a team in IPL, active investments require a deeper understanding and analysis of the asset before investing in or out of it. It requires you to know when it is the right time to buy or sell the investment.

Put:

Active Investing involves buying and selling of individual stocks, cryptocurrencies or other assets. It aims to beat average market returns by predicting market fluctuations. 

Purchasing individual stocks or cryptocurrencies at a low price and selling them at a premium is a classic example of active investing. 

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What Is Passive Investing?

Passive investing is when an investor or their portfolio manager follows a systematic and predefined rules-based approach to selecting assets.

It does not involve any active or hands-on practice. This strategy follows a buy and hold mentality.

Meaning, if you are a passive investor, you will invest for the long run and maintain the assets for a significant period. 

In other words:

Passive investing is a long term strategy in which you buy and hold a diversified array of assets. It aims to invest in the market as a whole and earn whatever the market generates.

An example of passive investing is Index Funds. Index Funds are generally traded in the stock market. However, the crypto market also offers index funds and ETF’s for passive investors. 

Key Differences: Active vs Passive Investing

Here are some of the primary differences between the two investing strategies.

Active Funds
  • Aims to outperform a specific index a.k.a Benchmark
  • Requires human intervention to make the right decisions
  • Carries higher expenses which may hamper the performance
  • If risks increase, investors can choose to exit a specific stock or currency.
  • Less tax efficient
Passive Funds
  • Aims to match and not beat the market performance
  • Generally automated by a predetermined set of rules.
  • Much lower expenses
  • Investors will be unable to act if the market crashes.
  • Buy and hold strategy avoids high annual capital gains tax.

Which Approach Is Right for You?

Like we always say, there is no one size fits all for all investors and what may suit you may not suit another investor. 

For perspective:

Suppose you do not have the time to do analysis and research in the market. Or do not have a financial advisor, passive investing may be a better choice. At least, you do not have to be behind the market and can save on high fees. 

On the other hand, if you are interested in being involved in their investments. And can afford the time and money to analyse research and make an educated decision. Active investing may seem like a good option.

However, for any investor, active and passive investing need not be an either-or option.

Meaning – You can build a diversified portfolio with a combination of active funds which you are familiar with and passive funds you want to explore.

This way, you can benefit from the best of both worlds. 

You should also know that all active funds are not equal. Some may have a better performance track as well as lower fees. 

For instance:

Investing actively in cryptocurrencies on the CoinSwitch Kuber platform does not cost you much on the fees. However, the cryptocurrency market generates high returns due to its price volatility but has the highest risk.

Bottom Line

  • So, is owning the IPL more profitable than betting on a team?
  • Is passive investing better than active investing?

At the end of the day, I do not have an answer to that question, nor does anyone else. But, you might want to consider the following before choosing sides when it comes to your portfolio.

  • Personal risk tolerance based on your goals and needs.
  • Creating a financial plan that works for you and your family.
  • Making rational rather than emotional money decisions.

As always, consider your own financial position, your goals and life stage before you invest your money.

Happy Investing!

[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Nisha Ramesh

Content Writer

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