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Passive vs. Active SIP Investments: Choosing The Right Approach For You

An active fund indicates that the fund manager is more involved in decision making and is more active in determining which stocks and bonds go into and out of a mutual fund portfolio and when. However, the fund manager cannot direct the movement of the underlying assets in passively managed funds. In this blog, we will get insights on active and passive SIP investment and what you should choose according to your knowledge.

Team Cube

Introduction To Passive And Active Investing

Passive investing is purchasing and holding a diverse portfolio of stocks or other assets with the goal of mirroring the market's overall performance. Passive investors minimise their portfolio's buying and selling, making this a particularly cost-effective approach to invest. The method necessitates a buy-and-hold mindset. Because of reduced expenses and the difficulties of regularly outperforming the market through active management, passive investment tends to outperform active investing.

On the other hand, active investing, as the name indicates, is a hands-on method that needs someone to serve as a portfolio manager. It entails actively studying and picking specific stocks in order to outperform the market. This strategy often entails more frequent purchases and sales of stocks, as well as other instruments such as bonds and options. It takes a far deeper study and knowledge to determine when to exit or enter a certain stock, bond, or asset. Active investors think that by using their knowledge and skills to find cheap or overpriced companies, they may outperform the market.


Passive SIP Investment Strategies

Passive investment approaches attempt to avoid the expenses and poor results that might result from frequent trading. The purpose of passive investing is to steadily accumulate money. Passive investors are not interested in short-term price movements or market timing. Some passive investing strategies are listed below:

1. Buy and Hold Strategy:

Buy and hold is a passive investment technique in which an investor purchases stocks and retains them for an extended length of time regardless of market movements. SIPs allow investors to invest in a portfolio of equities at regular intervals and keep them for several years. 

2. Dividend Reinvestment Plan Strategy:

A Dividend Reinvestment Plan (DRIP) is a programme that allows owners to automatically reinvest their dividends in new business stock. This technique entails investing in firms that provide DRIP through a SIP on a regular basis and reinvesting dividends to acquire more shares of the company's stock.

3. Asset Allocation Strategy:

Asset allocation is an investing technique that divides an investment portfolio among several asset classes in order to balance risk and return. This method entails investing in a mix of asset classes at regular intervals through a SIP, based on your risk tolerance and financial goals. Because each asset class has a different correlation to one another, asset allocation assists investors in mitigating the impact of risk on their portfolio.


Active SIP Investment Strategies

The investors in an Active SIP technique prefer to invest regularly in numerous sorts of investment possibilities. As a result, choosing a suitable strategy for active SIP investment is critical. Here are some examples of active SIP investment strategies:

1. Sector-based SIPs:

Investors can invest in sector-specific SIPs that are focused on certain industries such as banking, information technology, or pharmaceuticals. This method can assist investors in capitalising on the development potential of certain industries.

2. Portfolio diversification:

Spreading your SIP investments across various mutual funds can help minimise risk and boost profits. Investors may consider investing in funds of various types, including equity, debt, and hybrid funds.

3. Value Averaging:

Value averaging is a method in which investors alter their SIP investments depending on market performance. Investors can raise their SIP investments when the market is down, and lower them when the market is up.


Performance Comparison

Mutual funds are divided into two types: passive funds and active funds. Passive funds carefully follow a certain stock market index in order to mimic its performance. Because passive fund managers are not actively involved in investment decisions, they charge low fund management fees. An active fund manager, on the other hand, is responsible for buying and selling equities based on market research and analysis. As a result, active fund managers demand significantly greater fees than passive fund managers.

Active SIPs are frequently linked with increased risks and possible rewards. The notion is that by actively managing a stock or mutual fund portfolio, an investor may take advantage of market opportunities and perhaps create higher returns. However, this approach necessitates a significant amount of time and effort, as well as extensive research and analysis.

Overall, the decision between active and passive SIPs will be influenced by the investor's personal investment objectives, risk tolerance, and level of expertise. Before making any investing decisions, it is critical to thoroughly analyse these considerations. However, investing in any SIP involves financial risks, so we recommend that you consult with a Cube wealth advisor or coach before investing in any plan.


Factors to Consider When Choosing Between Passive And Active SIPs

Investors must examine a few factors while deciding between active and passive investment techniques. Certain points describe the nature of certain investment techniques and aid in the decision-making process.

1. Investment objectives:

Your investment objectives are one of the most significant aspects to consider. If long-term gain is your goal, an active SIP may be better suited because it seeks to outperform the market. A passive SIP, on the other hand, may be a better choice if your objective is to keep up with the market.

2. Risk Tolerance:

Another key element to consider is your risk tolerance. Active SIPs tend to be more volatile than passive SIPs since they seek to outperform the market. If you are willing to take on additional risk, an active SIP may be a better option. A passive SIP, on the other hand, may be a better option if you desire a more steady investment.

3. Time Horizon:

It is also vital to consider the duration of your investment horizon. If you have a longer investing horizon, say 10–20 years, an active SIP may be more suitable because it may provide larger returns. If your investing horizon is shorter, say 5 years or less, a passive SIP may be more appropriate because of its reduced risk profile.


Building A Balanced SIP Investment Portfolio


1. Choose both active and passive SIPs:

When it comes to creating a well-balanced SIP investment portfolio, combining active and passive SIPs might be a wise choice. Active SIPs are managed by fund managers who make strategic investments in order to outperform the market. Select active SIPs with a proven track record and a sound investment strategy. Passive SIPs, on the other hand, monitor the performance of a market index and require less management. Select passive SIPs with low expenses that track broad-based indices.

2. Asset allocation:

Asset allocation refers to splitting your investment portfolio among various types of asset classes, such as stocks, bonds, and alternative assets. You can choose your asset allocation based on your investing objectives and risk tolerance. This helps in creating a well-balanced investment portfolio.

3. Analyse and Adjust:

Monitor and rebalance your portfolio on a regular basis to ensure that it is consistent with your investing objectives and risk tolerance. To maintain the correct asset allocation, rebalance your portfolio on a regular basis. This allows investors to keep track of their money and make smarter investment selections.



How do management fees differ between passive and active SIP investments?

Ans. Mutual funds all have fees for their services. The most affordable funds are passively managed, which means they follow an index rather than requiring specialists to interact and make judgements. Because those experts tend to be expensive, actively managed funds charge higher fees. In this case, you may also use the Cube Wealth programme to obtain professional advice without any difficulty.

What is the role of fund managers in active and passive SIP investments?

Ans. A fund manager makes all decisions regarding the sale and acquisition of mutual fund units based on considerable study and research. Portfolio managers and their teams are constantly scrutinising and selecting the best-performing bonds, equities, and other instruments. They are constantly monitoring economic happenings, financial briefings, and stock market data. They perform market research and monitor the fund's performance before any investment.


Can I switch between passive and active SIP investments within the same fund family?

Ans. Investors can change their mutual fund investments within the same or a different fund scheme. Some fundamental rules for switching within the same fund scheme include meeting minimum investment criteria, bearing the burden of exit loads and capital gains taxes, and so on. Selling the present fund scheme and requesting redemption allows for inter-fund changeover.

How do market conditions impact the performance of passive and active SIP investments?

Ans. If the fund portfolio is well-diversified and hedged, the impact of a market downturn may be minimal. As a result, the performance of the securities in its portfolio will have a substantial influence on the fund's performance.

Each mutual fund is appropriately managed by a fund manager and their team. As a result, the performance of a fund is heavily dependent on the manager and his team. As a result, fund managers' decisions and tactics have a substantial impact on how well a fund succeeds.

If the fund's size exceeds a certain threshold, management becomes difficult. As a result, large funds with inadequate management often do badly.

The expense ratio has a significant impact on the return received from an investment. Reduced expenditure ratios increase the possible return of a mutual fund, whereas higher expense ratios result in reduced profits.

What are some common misconceptions about passive and active investing?

Ans. There are several fallacies surrounding market investment. With so many investment possibilities available these days, it may be difficult for investors to pick one. The following are some common misconceptions concerning passive and aggressive investing:

  • Passive investing ensures market returns.
  • Passive investing ensures market returns.
  • Passive investing removes active decision-making and potential bias.
  • Limits on Passive Investing Exposure to Risk
  • Active Management's Future Is Limited Active Strategies Fail to add value consistently

To summarise, both active and passive investing have advantages and disadvantages. As a result, there is almost no concept of a perfect investment plan. This is because what works well for one investor may not work well for another. Above mentioned are some points that you could consider while investing, but before that, proper research is very crucial. So, we suggest you download the Cube Wealth Application to consult a wealth coach at Cube because a wealth coach guides you in the overall development of your diversified investment portfolio with minimum risk.

Team Cube

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