Passive investing definition

What is passive investing?

Passive investing is an investing strategy that focuses on building wealth gradually, over the long term. Passive investors don’t seek to beat the market. Instead, they try to match its overall performance. Because of this, many passive investors choose to invest in index funds that track a benchmark market index – these funds are known as tracker funds or passive funds.

 

Passive funds vs active funds

The counterparts to passive funds are active funds. While passive funds seek to match or mirror the performance of a market index, active funds seek to outperform market benchmarks – otherwise known as ‘beating the market’.

And, while passive funds often have low fees, active funds tend to charge their investors a higher rate in order to invest in them. This is because, as the name suggests, they are ‘actively managed’. That means that it’s someone’s job to try and make the fund beat the market by investing in a range of handpicked investment opportunities.

 

Pros and cons of passive funds

Here are some of the main pros and cons of passive funds and passive investing.

 

Pros of passive funds

• They charge low fees
• You don’t have to manage the fund yourself – you just set and forget your investments and grow your money over the long term
• They often post stronger returns than their active counterparts

 

Cons of passive funds

• They don’t grant you ownership of company shares
• You don’t get to pick what goes into the fund
• They still charge fees – so you’ll have to assess which passive funds are best for you on a fund-by-fund basis