Active vs Passive Investing

Active vs Passive Investing: How Should You Invest?

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Since the 1970s, a big debate has divided the investment world into two – Active vs Passive investing.

Active investing is like depending on which team will win this seasons IPL, while passive investing is like owning a stake within the IPL itself.

Let me explain,

While depending on one team in IPL, what would someone do?

Analyse the team’s strength and weakness, gauge its performance against its rivals, and make a calculated back which team would grab the trophy this season. 

If you own the IPL, you recognize that not every team will win, but you would like not care. Because you recognize that the IPL will certainly happen and profits are sure to follow. 

Active and Passive investments work similarly.

Let us begin by understanding the meaning of the 2 terms before we get deeper into the talk .

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What Is Active Investing?

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As the name suggests, active investing involves a dynamic and hands-on approach to money management. It aims to beat the market’s average returns and take full advantage of the short term price volatility. 

Just like depending on a team in IPL, active investments require a deeper understanding and analysis of the asset before investing in or out of it. It requires you to understand when it's the proper time to shop for or sell the investment.

Put:

Active Investing involves buying and selling of individual stocks, cryptocurrencies or other assets. It aims to beat average market returns by predicting market fluctuations. 

Purchasing individual stocks or cryptocurrencies at a coffee price and selling them at a premium may be a classic example of active investing.

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What Is Passive Investing?

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Passive investing is when an investor or their portfolio manager follows a scientific and predefined rules-based approach to selecting assets.

It doesn't involve any active or hands-on practice. This strategy follows a buy and hold mentality.

Meaning, if you're a passive investor, you'll invest for the end of the day and maintain the assets for a big period. 

In other words:

Passive investing is a long term strategy in which you buy and hold a diversified array of assets. It aims to invest in the market as a whole and earn whatever the market generates

An example of passive investing is Index Funds. Index Funds are generally traded in the stock market. However, the crypto market also offers index funds and ETF’s for passive investors. 

Which Approach Is Right for You?

Like we always say, there's nobody size fits all for all investors and what may suit you'll not suit another investor. 

For perspective:

Suppose you are doing not have the time to try to to analysis and research within the market. Or don't have a financial advisor, passive investing could also be a far better choice. At least, you are doing not need to be behind the market and may save on high fees. 

On the opposite hand, if you're curious about being involved in their investments. and may afford the time and money to analyse research and make an informed decision. Active investing could seem sort of a good option.

However, for any investor, active and passive investing needn't be an either-or option.

Meaning – you'll build a diversified portfolio with a mixture of active funds which you're conversant in and passive funds you would like to explore.

This way, you'll enjoy the simplest of both worlds. 

You should also know that each one active funds aren't equal. Some may have a far better performance track also as lower fees. 

For instance:

Investing actively in cryptocurrencies on the CoinSwitch Kuber platform doesn't cost you much on the fees. However, the cryptocurrency market generates high returns thanks to its price volatility but has the very best risk.