There are two distinct approaches to stock market investment using funds: - Passive index-tracking
- Active management
Both have their merits. |
What is the difference?
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- Index-tracking funds aim to mirror the performance of a particular stock market index or sector index. They do this either by holding shares in all the companies that are included in the index, or in a representative sample of those companies.
- Actively managed funds invest in a selection of shares chosen by the fund manager. They aim to do better than the stock market, but very few achieve that aim consistently.
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Most funds are actively managed, but trackers are a fast-growing sector of the market and offer compelling advantages.
Why would I want a tracker?
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- They take the guesswork out of investment. Instead of trying to beat the market, they join it.
- They also remove the risk of doing worse than the stock market, although they do not lower the risk of stock market investment. Most actively managed funds fail to beat the stock market index over the longer term.
- They are usually low cost, typically costing nothing to buy and 1 per cent a year or less to run.
- They remove the risk of choosing a dud fund, making trackers a safer option than actively managed funds if you do not want to take advice or do much research before buying.
- They make a good base for a portfolio, to which you can add actively managed funds investing in particular areas.
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Are there any disadvantages?
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- Trackers follow the market down as well as up. Most active funds cannot avoid doing the same to some extent, but may offer some defence.
- They will never do better than the index, whereas active funds can and do, although not consistently.
- They are only as good as the index they track, and some indices are not a very good proxy for the market they represent.
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