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Active vs passive equity fund in Singapore

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Active vs passive equity fund in Singapore

Singaporeans are taught the importance of financial planning and investment from a young age. This is especially important in a country with an ageing population, as retirees will soon outnumber working-age citizens. There are many different investment options available in Singapore, but two of the most popular are active and passive equity funds. So, which is better for you? Let’s take a look at the pros and cons of each.

The two most popular investment funds in Singapore are active and passive equity. They differ in how they invest your money – active equity funds aim to beat the market by timing their purchases and sales, while passive equity funds aim to match the market’s performance.

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Both have pros and cons, so which one is right for you? It would help if you considered your goals, risk tolerance and investment horizon before deciding.

Active equity funds

Active equity funds are managed by professionals who use their expertise to pick stocks and time trades to try and outperform the market. They often employ high-risk strategies such as short selling, leveraged positions and complex derivatives. Because an ETF is passively managed, it tends to have lower fees than actively managed mutual funds. Active fund managers must be well-versed in financial markets and understand how different investment strategies work.

Pros

Active equity funds have the potential to generate higher returns than other investment options. By timing trades correctly and taking advantage of market opportunities, active fund managers can generate higher returns for investors. Additionally, active funds allow investors to participate in the performance of specific companies or sectors they are interested in. 

For example, an investor bullish in the technology sector may choose to invest in an active equity fund that focuses on that sector. While there are no guarantees of success, investing in active equity funds offers investors the potential to achieve superior returns.

Cons

The main downside of active equity funds is the higher costs involved. Active fund managers are paid for their services, and these fees can significantly reduce returns. In addition, active management can lead to elevated levels of risk. For example, managers may take on leverage to boost returns, which can amplify losses in a market downturn. Finally, active management often fails to outperform the market over the long term.

Many investors believe it is impossible to beat the market, so they prefer investing in index or exchange-traded funds. While active management has some drawbacks, it can still be a successful investment strategy for those willing to accept higher costs and risks.

Passive equity funds

Passive equity funds aim to match a benchmark index’s performance rather than outperform it. The Straits Times Index (STI) is one such benchmark. Commonly known as index funds, passive equity funds are traded on stock exchanges just like regular shares. But instead of being managed by a professional fund manager, they are run by computer algorithms that track the movements of the underlying index. 

Passive equity funds offer several benefits. They are usually lower in fees than active equity funds and tend to be more tax-efficient. Additionally, because they are not actively managed, they are not subject to the same level of market risk. As a result, they can provide a valuable way to diversify an investment portfolio. For all these reasons, passive equity funds have become increasingly popular in recent years.

How to choose

There is no one-size-fits-all answer when choosing between active and passive equity funds. The best decision depends on investment goals, risk tolerance, and time horizon. An actively managed fund may be a good choice if you want to achieve long-term growth potential. Active managers can adjust their portfolios in response to market conditions, which can lead to outperformance. However, these funds also come with higher expenses and greater risk.

On the other hand, passive funds track a benchmark index and generally have lower costs. While they may not outperform in strong bull markets, they tend to hold up better during market declines. As such, they may be a good option for investors seeking stability and peace of mind. When it comes time to choose between active and passive funds, be sure to carefully consider your unique financial situation.

In conclusion

Active and passive equity funds offer different advantages and disadvantages. Active management offers the potential for higher returns, while passive management provides lower costs and less risk. Ultimately, the right choice depends on your individual goals and objectives. By taking the time to understand both strategies, you can make an informed decision that is best suited to your particular needs.