Active Vs. Passive Management in Mutual Funds

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    Background

    • This article reflects information from the paper Active vs. Passive Money Management by Baird's Advisory Services Research.

    Decision Making Process

    • The goal of passive funds is to duplicate the performance of the chosen market index. Active management looks to profit from market conditions.

    Investment Management Fees

    • The management fees for passive funds are generally lower than for active funds because managers are not needed to make as many buying and selling decisions.

    Tax Efficiency

    • Passive funds are generally tax efficient because they create fewer capital gains for investors while the tax efficiency of active funds depends on the investment manager.

    Returns

    • Active funds have the potential to achieve returns higher than the overall market while passive funds do not. Both types of funds can have below market returns. Passive funds cannot protect from losses in a down market, because they follow the index. However, active funds can offer protection in a down market because they have the potential to do better than the market.

    Expert Insight

    • According to Baird's, to decide between active and passive funds, you want to consider your expected time horizon, tax sensitivity, ability to tolerate performance variation and other factors.

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