Active Fund

A fund manager’s expertise, experience, and judgment are employed by investors in an actively managed fund. An active manager who runs an automotive industry fund might have extensive experience in the field and might invest in a select group of auto-related stocks that the manager concludes are undervalued.

Active fund managers have more flexibility. There is more freedom in the selection process than in an index fund, which must match as closely as possible the selection and weighting of the investments in the index.

Actively managed funds allow for benefits in tax management. The flexibility in buying and selling allows managers to offset losers with winners.

The ability to outperform: Studies show that most actively managed funds underperform passive funds over the long haul, primarily because of the difference in fees. But it’s a mistake to categorize all active funds as too costly to outperform.

Credit smarts: The advantage of active funds over passive funds can be debated in stocks, but there is one corner of the asset management industry where almost everyone agrees active management is better: bonds and fixed-income investments.

Active funds can be opportunistic: Passive funds typically employ rules-based investment strategies in which investments are effectively picked by a checklist. These rules generally work, but when everyone rushes into one popular trade, it can create some imbalances that wouldn’t necessarily happen if passive funds played a smaller role in the market.