Investments
Thursday Terminology
Active and Passive management
Open-ended investment funds are a genious invention for us everyday retail investors - and understanding the difference between active and passive managment is key for making the best savings and investment fund choices for you. Because it does make a big difference as regards what you get from your savings/investments at the end.
Open-ended investment funds are brilliant. The reason is that they make key investment strategies available for retail investors without the need to have the monies available that it would normally require. The solution is the pooling of many retail investors capital - that way even the tiniest savings from an everyday person can reap the benefits. The main benefits relate to diversification - compared to direct investments in e.g. shares, through a fund you can balance your savings even if it's 10 dollars a month that you are putting aside in savings. And you get the benefit of professional investment professional setting the investment strategy (be it through structuring a passive fund or ongoing active managment in accordance with a predetermined investment policy) even if your savings would never be able to pay for professional managment if you were not part of a pool with other investors splitting the cost so it is only a fraction left for you to pay eventhough the competence and focus will be applied 100 % to the fund in total and hence also to your portion.
The main difference that you need to understand when choosing between the brilliant funds is active and passive managment, as this choice affects expected value development, risk profile and fees/costs for saving in the fund.
Active management
Here we have professional managers making active decisions where to place the fund's money - when to buy, sell and hold. The benefits is expected outperformance if the managers' strategy works out.
The downside expected is higher costs compared to the alternative.
Passive management
Here the fund will replicate an index (such as the OMXS30 index), and hence there is really no active investment decisions being made. The value development will be that of the index. No more no less (at least in theory). The upside is that the fees/costs will be lower (as a rule) compared to actively managed funds.
What does the research say?
The research is not conclusive. But it does (strongly) indicate that active management is often in fact not outperforming the passive funds. They may therefore cost you more - often also through so-called hidden fees that can be fund-in-fund structures or commissions that you do not see - while not outperforming the index they are benched against.
Investment and savings are the best way to build for the future. And its worth taking the time to look at what you have and consider if it really is the best for you.
Stockholm, 2023-11-02
Authour: Katarina Strandberg
Open-ended investment funds are brilliant. The reason is that they make key investment strategies available for retail investors without the need to have the monies available that it would normally require. The solution is the pooling of many retail investors capital - that way even the tiniest savings from an everyday person can reap the benefits. The main benefits relate to diversification - compared to direct investments in e.g. shares, through a fund you can balance your savings even if it's 10 dollars a month that you are putting aside in savings. And you get the benefit of professional investment professional setting the investment strategy (be it through structuring a passive fund or ongoing active managment in accordance with a predetermined investment policy) even if your savings would never be able to pay for professional managment if you were not part of a pool with other investors splitting the cost so it is only a fraction left for you to pay eventhough the competence and focus will be applied 100 % to the fund in total and hence also to your portion.
The main difference that you need to understand when choosing between the brilliant funds is active and passive managment, as this choice affects expected value development, risk profile and fees/costs for saving in the fund.
Active management
Here we have professional managers making active decisions where to place the fund's money - when to buy, sell and hold. The benefits is expected outperformance if the managers' strategy works out.
The downside expected is higher costs compared to the alternative.
Passive management
Here the fund will replicate an index (such as the OMXS30 index), and hence there is really no active investment decisions being made. The value development will be that of the index. No more no less (at least in theory). The upside is that the fees/costs will be lower (as a rule) compared to actively managed funds.
What does the research say?
The research is not conclusive. But it does (strongly) indicate that active management is often in fact not outperforming the passive funds. They may therefore cost you more - often also through so-called hidden fees that can be fund-in-fund structures or commissions that you do not see - while not outperforming the index they are benched against.
Investment and savings are the best way to build for the future. And its worth taking the time to look at what you have and consider if it really is the best for you.
Stockholm, 2023-11-02
Authour: Katarina Strandberg