Active v Passive Funds: What you need to know as an investor
3 June 2026
Active v Passive Funds: What you need to know as an investor
The world of investment can be daunting for newcomers. Where do you start?
Picking a fund can be very confusing, given there are simply tens of thousands to choose from. Funds come in all shapes, sizes and structures and knowing which one to include in a financial plan is not easy as many considerations will come into play.
Risk profile, cost, region and underlying asset class are all crucial aspects of a given fund that investors would need to understand, but many trip up at the first hurdle. This is because many fail to understand that funds can largely be split into two camps: active or passive.
This guide will explain the differences between them.
Active Funds
Active funds are called this because they are actively managed by a person, or team of people.
These professional fund managers are tasked to oversee portfolios and make all the required investment decisions. Their job is to focus on their given markets, pick investment opportunities and pursue the right level of return for the appropriate level of risk.
Here is an example of how it would work. ABC Asset Management would employ a fund manager, Joe Smith, to run a UK Equity Fund. Joe is given a mandate to take investors’ money and buy shares in UK equities – so he will go and research the UK market, meet with various companies and decide what the portfolio should look like. Investors are essentially putting their faith in Joe, as a professional fund manager, to find the best companies while avoiding unnecessary risk. This extends to making sure the fund isn’t exposed to potential economic risks (for instance, Joe may want to avoid exposure to high street retailers if it is anticipated people will spend less).
Active funds cost more because the fees have to cover the fund manager costs (Joe Smith’s salary, and all the costs involved in meeting and researching companies to invest in). Fund management companies have lowered these costs in recent years due to growing scrutiny, but they still remain more expensive than passive funds – more about that later.
However, people will pay more for an active fund because if they back the right fund manager they could potentially get access to higher returns. This is because a good fund manager may be better skilled at finding companies’ others aren’t investing in, while also ensuring the fund has limited exposure to problem areas and can be shifted should issues in the economy occur.
Pros
- Potential for higher returns and market outperformance
- Ability to avoid specific underperforming companies and sectors
Cons
- Can be expensive
- Performance depends on skills of fund manager and their team
Passive Funds
Passive funds are not actively managed by people. Instead, these funds are created to replicate the performance of a specific benchmark which is why they are also sometimes called trackers.
For example, ABC Asset Management may launch a FTSE 100 Passive fund which would track the FTSE 100 index. If the FTSE 100 goes up, the FTSE 100 Passive Fund goes up and the same happens if the index falls. Investors can buy passive funds for all kinds of benchmarks and there is an increasing amount of flexibility around these – it is now not uncommon for a company to create a bespoke benchmark for a fund to track, or to remove certain elements from a pre-existing benchmark (for example, ABC Asset Management could make a FTSE 100 tracker without bank stocks).
The idea behind a passive fund is to get exposure to a given market but without trying to outperform it. Without a dedicated fund manager or team, the overhead costs of a passive fund are a lot lower, and this has allowed passive funds to gain popularity. Passive funds are nearly always cheaper than active funds meaning investors can gain access to markets but at a much lower cost.
An added advantage of this means passive fund investors aren’t exposed to poor fund manager choices. Fund managers may be professional investors but like all humans they will make mistakes. Passive funds simply and automatically track their underlying benchmark, meaning their investors don’t have to worry about being exposed to underperforming specific companies or securities. However, passive fund investors also miss out from the potential outperformance a professional fund manager can bring.
Pros
- Often cheap and easy to analyse
- No exposure to poor fund manager choices
Cons
- Don’t offer market outperformance
- Can leave investors exposed to underperforming areas of the market
Key Considerations
Active and passive funds can both play an important role in an investor’s portfolio, but it’s important to understand how differently these are structured. Active funds have the potential to generate higher returns for investors, but this involves paying more to back a fund manager in the hope that they make the right calls. Meanwhile passive funds are cheaper and offer market exposure, replicating how that benchmark performs, but nothing else.
Each choice requires due consideration around cost, risk and the kind of exposure an investor wants in their portfolio. This also has a lot to do with an individual’s financial plan and the role their investments are required to play.
To learn more about active and passive funds, you can contact the GWA Wealth team at:
Telephone: 01289 306688 Email: wealth@gwayre.co.uk
As always with investments, your capital is at risk. The value of investments is not guaranteed and the income from them can fall as well as rise. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole consideration when selecting a product. This article is intended for information purposes only.
