INVESTMENT CLINIC:  What is the difference between active funds and passive funds?

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Holly Black for the Daily Mail

I’ve read about active funds and passive funds — what is the difference and which is better?

L. K., Torquay.

An active fund is run by a manager who makes decisions about where to invest money.

Man vs machine: An active fund is run by a manager who makes decisions about where to invest money. Passive funds are run by computer 

Man vs machine: An active fund is run by a manager who makes decisions about where to invest money. Passive funds are run by computer 

Man vs machine: An active fund is run by a manager who makes decisions about where to invest money. Passive funds are run by computer 

Each fund has a strategy — for example, a UK Equity Income fund backs British businesses which can grow your money as well as pay a dividend — and the manager will decide in which company shares to invest to generate the best returns for that remit.

A passive fund is often known as a tracker or index fund. These are run by a computer and simply aim to copy a chosen stock market such as the FTSE 100. 

Because there is no fund manager to pay, passive funds are usually much cheaper than active, with charges as low as 0.06 per cent a year compared to an average of 0.75 per cent for active funds. 

Neither type is better. Which you choose depends on your goals and how you prefer to invest.

The main reason you would pick an active fund is that you believe the fund manager can beat the stock- market by creating his own mix of companies to invest in, often incorporating lesser-known businesses.

This is a risk because not all active funds will achieve this, but it can pay off if you back the right manager. 

For example, the Chelverton UK Equity Growth fund is up 26 per cent over the past year while the FTSE All Share is down 1.48 per cent over the same period. 

The Chelverton fund charges 1 pc a year compared to just 0.08 per cent for the Vanguard UK FTSE All Share Index tracker fund, but it’s performance means it would more than have paid for itself.

  • Email your questions to money.mail@dailymail.co.uk or post to Investment Clinic, Money Mail, Northcliffe House, 2 Derry Street, London W8 5TT.

 

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