What is a passive management investment fund?

Definition and Examples

A passively managed investment fund typically tracks a market index, such as the S&P 500 or a specific sector. There is no active strategy by the fund manager for buying or selling.

How a Passively Managed Investment Fund Works

An investment fund is a company that has a management team. The team selects an index to track based on the fund’s strategy and objectives, buys stocks or other investments that will make up the portfolios, and offers fund shares to investors.

What This Means for Individual Investors

Passively managed investment funds typically track indices, which requires you to adhere to a number of standard investment principles such as diversifying your portfolio, investing in what you know, not chasing performance, and not letting emotions influence your decisions. Passively managed funds reduce risk because they track market indices that are designed by leading analysts. By investing in a fund, you gain exposure to all the assets within that fund – many of which will be well-known companies.

Types of Passively Managed Investment Funds

There are many types of passively managed investment funds. Equity index funds are the most well-known, but there are many different classes of funds that use equity indices based on factors such as market capitalization or sectors. Here are some examples:

– Equity index funds: Many funds track the S&P 500 or other indices such as the Dow Jones Industrial Average or other equity indices.

– Bond index funds: Bond index funds track indices made up of bonds. For example, the Bloomberg Aggregate Bond Index and the S&P U.S. Aggregate Bond Index consist of bonds carefully selected by experts at Bloomberg and Standard & Poor’s.

– Market capitalization funds: Market capitalization funds can mimic indices that are benchmarks for the stock market like the S&P 500, but they will follow these indices based on the market capitalization of the companies within the index.

– Sector funds: Sector funds focus on specific sectors such as energy, healthcare, consumer goods, or financial services.

Are Passively Managed Investment Funds Worth It?

Passively managed investment funds have lower carrying costs since there is no fund manager making decisions about where to invest the money. The fund’s performance will align with the core performance of the index. In 2021, passively managed funds prevailed despite the higher performance of actively managed investment funds. According to the Morningstar Active/Passive Barometer report, 45% of active funds performed better than their passively managed peers, meaning that 55% of passively managed investment funds outperformed actively managed investment funds.

For conservative investors who have no desire to outperform the market, passively managed investment funds can be a suitable option due to their performance and low fees.

Source: https://www.thebalancemoney.com/what-is-a-passively-managed-fund-2466448