An active mutual fund, also known as an actively managed fund, is an investment vehicle where a fund manager actively choose and oversee a portfolio of securities. Active funds cater to both short-term and long-term investment goals.
What is an Active Fund?
Active fund is a type of mutual fund that is managed by experienced and knowledgeable experts with an aim to outperform the market’s index. The active fund makes its investments after conducting extensive research on its investment options, which involves higher costs when compared with passive funds, such as index funds that mirror the performance of the market. Hence, the investor needs to carefully examine the performance of the fund, the strategies it adopts as also his personal risk tolerance prior to investing.
Principal Features of an Active Fund
The most notable feature of an active fund is that it aims to beat the overall market index’s performance by frequently buying and selling assets. Its main investment goal is beating the market. Hence, its expense ratios are higher by way of transaction costs, management fees and extensive research.
Moreover, an active fund usually gives out returns that are potentially higher, and its risk level also is higher owing to the dynamic investment decisions taken. However, this cannot be guaranteed. It is more difficult to predict the performance of an active fund even though they are very proactively managed. In other words, the fund’s manager decides how the money will be allocated on the basis of market forecasts and research coupled with his own judgment. Risks associated with active funds are known to be better managed since their fund managers quickly adapt to changes in the market. Moreover, their diversified portfolios help substantially in reducing risk.
Types of Active Fund
The following are the types of active funds:
- Equity Funds: Equity Funds are the type of active fund invests in stocks primarily, and its managers choose stocks that are strongly predicted to beat the market.
- Balanced Funds: Such funds make their investments in equities primarily along with fixed-income securities. The fund manager adjusts the ratio on the basis of prevailing market conditions. Read more about, What are balance funds.
- Bond Funds: A Bond Fund is also called a fixed-income fund, and these make their investments in bonds as well as other assorted debt instruments, intending to provide its investors with a steady income. Read more about, What is a bond fund.
- Index Funds: Even though these are passively managed typically, certain index funds can be actively managed also, and their managers aim at outperforming the index. Read more about, What are index funds.
- Sector Funds: A sector fund focuses on certain sectors like healthcare or technology, and its managers select securities available within such specific sectors to grow potentially. Read more about, What are sectoral mutual funds.
- Fund of Funds (FoFs): As a mutual fund, a Fund of Funds scheme invests in a highly diversified portfolio comprising other assorted mutual funds instead of investing directly into bonds, stocks, or other available securities. The manager of the FoF aims at a much broader diversification to achieve specific and pre-determined investment objectives by choosing and combining several funds with their respective asset allocation strategies.
- Global and International Funds: Such an active fund makes investments in selected securities that are available beyond the home country of the investor or even worldwide.
High-return mutual fund categories for smart investing
Advantages of Active Funds
Any active fund is operated on the basis of its manager’s experience, judgment, and expertise. For instance, the active manager investing in the automobile industry may be highly experienced in the sector and may invest in certain undervalued auto-related stocks that might yield high returns later. More managers of active funds can be more flexible as they have the freedom to select their investment options.
Moreover, active funds enable easier buying and selling for their managers to offset losses against gains. Additionally, their managers are more adept at managing risks. Furthermore, they mitigate risk also by applying appropriate hedging strategies like using derivatives and short selling.
In terms of performance also, active funds have shown better performances over a ten-year period. From 2011 to 2021, active funds investing in small-growth stocks beat the indexes in most cases, and according to a study, nearly 88% of all active managers actually outperformed their respective benchmark indexes before deduction of fees. This has increased their credibility and trustworthiness among investors who are willing to risk investing in such funds.
If you are an investor and want to start your investment journey, you may visit the Bajaj Finserv Mutual Fund platform to know more about mutual funds and SIPs. Feel free to make use of their Lumpsum calculator and SIP calculator to calculate your financial goals better.
