In business, it is the process in which capital is created or creating goods which are capable of creating some other assets. In economics, investment is the process in which capital goods (assets), are purchased with an intent of generating extra income (profit) from them.
The core aim of investing is therefore to gain profit. It, therefore, involves the management of funds to achieve benefits. These managed funds are investments which are pooled, containing couples of different securities so that individual investors outdo the risks of having to hold minimal individual shares or even bonds.
Ways of managing funds in investment.
There are two different ways in which these funds may be managed in the economy for the investors to realize gains on their capital. These various modes of managing funds breed about portfolios for investment. These are the strategies for investment that investors usually use to create returns in their accounts of investment. These portfolios are the active portfolio management and the passive portfolio management
Active management portfolio.
The managers are radical here. The professional fund managers or team researchers are used to buying and selling the stocks with an aim to outperform a particular market index. The primary purpose of this portfolio is to beat the return of this index.
Investors in this management strategy seek to surmount a Providence bond or equity market or achieving a specific investment objective. They aim to analyze the market to identify and buy such undervalued investments and sell them when they become overvalued.
Better still, they use the human element such as managers who actively manage the funds. It is, therefore, important to note that they mostly rely on forecasts and several analytical types of research and therefore their experiences, as well as their decision, is needed before the purchase of any security. The laid hypothesis in the market is not adhered to.
Passive management portfolio.
Investors here have to pay very close attention to the trends in the market, shifts in the economy as well as the vibrant changes to the political landscapes and many other unlimited factors which all make some impacts to the specific companies in which they need to invest.
They have in mind that it is hard to out-think the market and therefore their deeds are driven towards matching the market’s performance. They try to track individual investment index, with a precise objective of matching that index and not trying to beat it whatsoever. This portfolio attempts to track a weighted market index. The investors aim to maximize over the long run by maintaining a minimum amount of buying and selling.
This is done in two approaches. The first approach is the replication method, which is the straightforward matching, where they track the performance of a target index closely and where each fund holds every security in its goal which is the same proportion as that of the index.
The second approach is the sampling plan. This is most important especially when the index is a bit complicated or extensive to adhere. Here they select a representative of the securities from the index under consideration and then reflect it regarding the core risks likely to be involved and other factors. The use of complex mathematics is thus eminent in this approach.
Choice of the best portfolio.
There have been arguments on which management portfolio to follow and which not to follow between the investors.
In active management portfolio, the managers can actively manage the funds from their extensive knowledge and experience in stocks that they think they are undervalued and will be overvalued shortly, based on their experience also. They are also able to buy and sell when deemed necessary. This makes the portfolio very flexible and possible to offset the losing investments with winning investments unlike in the passive management portfolio.
On the contrary side, it is expensive in that your funds are actively managed.
The passive management portfolio is in itself time efficient. This is so in that there is no necessity to expend time as well as resources on the market timing and stock selections. This makes it a bit cost effective as compared to the active management portfolio.
Also, the time span for the funds to breed returns is known. This is problematic in that it tracks the entire market and therefore when there are factors that lead to the market to fail, the fund also does.
Investors are also prohibited from pooling their shares at will. This makes passive management portfolio lack flexibility.
The choice for the best portfolio, therefore, depends on how one chooses the advantages of one portfolio over the disadvantages of the other. This is all what an investor needs to know and should hitherto be shared.
Other sources of reference.
http://www.investopedia.com/ask/answers/040315/what-difference-between-passive-and-active-portfolio-management.asp
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- Jamal Moustafaev
- Publisher: Auerbach Publications
- Edition no. 1 (09/30/2016)
- Xinfeng Zhou, Sameer Jain
- Publisher: Xinfeng Zhou
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- Publisher: Cengage Learning
- Edition no. 11 (05/16/2018)
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