What Is the Difference Between Active & Passive Index Funds?
Index funds are investment funds that link directly to an individual stock market or category of it. Both active and passive index funds use a stock market or category of the market as a benchmark for the makeup of the funds.
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Active Index Fund
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Active index funds involve a two-pronged approach to investment. First, the funds replicate the results of a particular index in the stock market. Second, the managers of the funds choose additional stocks that they believe will thrive and outperform the market, based on research and other information, including trends in the stock market.
Passive Index Fund
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A passive index fund involves creating a portfolio for the fund that matches the index that it hopes to emulates. A passive fund guards against major losses while seeking a steady, positive return on investment. It does not attempt to beat the market.
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Benefits of Passive Index Fund
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A passive index fund is considered a safe, conservative investment. Because much less management is required, the fees for investing in a passive index fund are much smaller than those for investing in an active index fund. Financial returns, especially when factoring in management fees, are often comparable.
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