[DerivativeABC] What Are Passive and Active Funds?

[Image source=Yonhap News]

[Asia Economy Reporter Ji-hwan Park] When dividing investment patterns for fund products into two categories, there is a method of classifying them as 'passive' and 'active.' Passive refers to products that track an index, while active refers to an investment method that actively seeks out individual stocks.

Passive funds are, in short, a passive strategy. They follow a specific index such as the KOSPI, with a representative product being index funds that track stock indices. The goal is to achieve returns equivalent to the market average return.

Until recently, passive funds were the mainstream. Over the past decade, passive investment has become dominant since the 2008 global financial crisis, as its risk management advantages were highlighted. Additionally, relatively low fees have been emphasized as a benefit.

On the other hand, active funds refer to products where fund managers actively manage the fund. Fund managers seek stocks expected to rise in price and aim for excess returns above the benchmark return. They aggressively manage the fund by repeatedly 'buying' and 'selling' the stocks held within the fund.

Because of aggressive investment for higher returns, volatility and risk burdens follow. Also, since more time and effort are invested to achieve excess returns, higher fees are charged. On average, the fee level is about 1.25%. It is also true that investors face the possibility of low returns or principal loss due to the high fees.

Since the first half of this year, following the impact of the novel coronavirus infection (COVID-19), there is a global trend of capital flowing into active funds. However, domestically, due to the personal investor stock investment boom that started with movements like the 'Donghak Ant Movement,' the atmosphere is spreading where investors prefer direct investment rather than putting money into funds for investment.

This content was produced with the assistance of AI translation services.