Actively managed funds buy and sell investments rather than buy and hold them.
Investors typically compare a mutual fund’s performance against the return of the entire stock market.
In an attempt to outperform the market, managers of actively managed funds trade their holdings periodically.
Trading is what makes them “active” rather than “passive” in their investment approach.
Some investment managers believe they can beat market performance by selecting specific investments over others. They actively choose which stocks and bonds to include in a portfolio and which to ignore.
Active managers do this using fundamental analysis, making judgments of securities based on the financial health of those companies.
Public statements of income, profit, debt and business costs can help the active manager decide if the company is positioned to improve its position in the marketplace.
Some also also use technical analysis, which is looking for patterns in investments and markets.
A technical analyst is less concerned with the inner workings of the individual firms and more focused on demand for the stock among other investors.
Whether using fundamentals or technical tools, the goal of the actively managed fund chief is to choose investments that have the best chance of outperforming others.
Over time, that relative advantage may improve or erode, leading the active manager to buy or sell shares in the portfolio.
The alternative to actively selecting investments is passive investing. Passive investing is the concept of owning entire markets of securities, traditionally through index funds.
A passive investor seeks the return of the whole market. Comparatively, the actively managed fund investor believes he can beat the performance of a market.
Actively managed funds may be traditional mutual funds, exchange-traded funds (ETFs) or other collective investment vehicles.
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