InvestorQ : What are the pros and cons of employing a mutual fund manager?
Shreya Mashelkar made post

What are the pros and cons of employing a mutual fund manager?

2 years ago
Basically, this is the difference between active funds and passive funds, which is as follows:
Active Funds are managed by fund managers who actively look into the portfolio producing returns slightly different from the actual market. In the active style of investing, when you invest your money in a Mutual Fund scheme, an expert called the Fund Manager along with his team uses his expertise to build a portfolio of securities on your behalf. The fund manager and his team also make tactical investment decisions such as which stocks to buy, at which price to buy, at which price to sell, etc. on your behalf. To make these investment decisions on your behalf, these experts continuously track market dynamics, scrutinize details of companies that they invest in, keep track of the state of the economy among other things.

Since the fund manager is actively involved in making investment decisions, the style of investing known as ‘Active Investing’ and the Mutual Fund schemes that they manage are called ‘Actively Managed Mutual Funds.’

Passive Funds generally replicate the composition of actual market indices. They follow the market's trend and generate similar returns. In the passive style of investing, the fund manager has a limited role to play when it comes to making investment decisions. Here the fund manager does not use his skills to build a portfolio or take tactical investment calls such as when to buy or sell stocks on your behalf.

Apart from the style of investing, actively managed Mutual Funds and passively managed Index Funds can differ on three other parameters -

  • Expense Ratio - The cost charged by Mutual Funds to manage your money
  • Returns that both these funds can generate
Generally, passive, low-cost, well-diversified, broad index funds are a great choice. Even the largest institutional investors use them for much of their capital. When you venture off into active management or non-market-value weightings, you take your chances and the outcome is yours to bear.