Active vs Passive Investing: What’s the Difference and Which is Better?

‘Bazaar ka kya hai, kabhi upar kabhi neeche!’

Aarti invested ₹4 lakh in stocks. She checked charts daily, followed every expert on Twitter, and made 17 trades in 6 months. Her net 

return was ₹18,500 after fees. And how can I forget the headaches she endured? 

Her brother Saurav, on the other hand, invested ₹5 lakh in a passive Nifty 50 fund and forgot about it. In one year, he made ₹42,000 with zero screen time.

Compare their journeys:

There are no ‘good and ideal investments’. It becomes best when it adapts to your situation. ‘Paisa toh sabko banana hai, par tareeka sabka alag hai!’ 

So, let’s learn about the two types of investment in this blog. 

Active Investing
 

When my cousin Neha quit her job to manage her portfolio, she checked stock trends every morning before breakfast. 

This type of investment, where you are constantly involved, is called active investment. Here, you buy and sell based on research and predictions.

You're trying to beat the market, but it takes time, effort, and comes with higher costs. Frequent trades and advisor fees make them risky.

For example, Rohit invested ₹5,00,000 in stocks in 2023. He bought 1,000 shares of a small-cap tech company at ₹500 per share, totalling ₹5,00,000. By the end of the quarter, the stock had fallen by 15%, and he sold it at ₹425 per share, incurring a loss of ₹75,000. 

Read More – A Passive Investment Strategy in Nifty Can Provide Consistent Returns Over Time

Despite some wins, such as a 25% gain on his investment in an electric vehicle company, his transaction costs and advisor fees of ₹50,000 reduced his overall returns, resulting in a net gain of just ₹80,000 for the year. Have a clear view of his finances with the help of the table given below: 

Passive Investing
 

My father prefers putting money in index funds or fixed deposits. This way, he can focus on other things and use the money after retirement. This relaxed mode of investing is known as passive investment. You invest in funds that track market indices, such as the Nifty 50 or S&P 500. 

You don’t buy or sell often, so costs are low, and it’s less stressful for long-term goals.

For example, Meera invested ₹10,00,000 in an S&P 500 Index Fund in 2018. Over the next five years, the fund averaged a 10% annual return. By 2023, her investment had grown to ₹16,10,510, earning her a profit of ₹6,10,510. 

She hasn’t made any additional trades or changes to her investment. Her total fees for the entire 5-year period were only ₹25,000. Study the table to have an overview of her finances:

Key Differences Between Active and Passive Investing

Management Style
 

 Ravi, my neighbour, reads financial news daily and adjusts his investments accordingly.
You guessed it right, that’s active investing. You monitor the market, analyse stocks, and make frequent changes. Passive investing, on the other hand, is like autopilot. You have a set target, and your money just follows it.

For example, Aarti spends an hour daily on her ₹4 lakh stock portfolio. In contrast, her brother Saurav invested ₹5 lakh in an index fund in 2022 and hasn’t touched it since. You can see the differences between both of their styles using the table given below:

Cost Implications
 

I noticed my mutual fund statement had a hefty management fee last year. I thought it was a passive fund, but upon reviewing some documents, I realised that it was actively managed. 
 

Active funds generally charge more because experts are making decisions for you. Passive funds, which track the market automatically, typically cost less. This can save you a lot of money over time.

For example, Ramesh invested ₹2 lakh in an actively managed mutual fund and paid ₹5,000 in fees last year. His colleague Nidhi put ₹2 lakh in a passive index fund and paid just ₹500. Though both funds earned similar returns, Ramesh’s net return was ₹15,000, and Nidhi earned ₹19,500. You can refer to the table below for an overview of their finances.

Risk and Returns

During 2023, my cousin’s actively managed fund gave him 16% returns on ₹3 lakh. The net profit was about ₹48,000. My passive fund earned 11% on ₹3 lakh. So, my total was ₹33,000. 

He outperformed, but his fund also dipped 9% the previous year. Active investing can outperform, but it is volatile. Passive investing provides steady, lower-risk returns that align with market trends.

Also Read - Focus On Low-Cost Index Funds or ETFs That Track Nifty for Long-Term Growth

For example, Priya invested ₹4 lakh in a tech-focused active fund. It returned 20%, earning her ₹80,000. However, in 2022, the same fund lost 12%, resulting in a loss of ₹48,000. Her friend Arjun invested ₹4 lakh in a passive Nifty 50 fund. 

He earned ₹36,000 (9%) in 2024, and to date, he has maintained a steady net return. Let’s quickly compare using the table given below:

Conclusion

Large numbers can tempt anyone, but before investing actively, can you give the time, effort, and risk it demands? If not, you can always go with passive investing. It offers steady growth without any ‘jhik-jhik’. Choose based on your goals, time, and the level of involvement you prefer.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?