passive fund

A collective fund which does not try to beat the index, but simply aims to track it by investing in companies precisely in accordance with the constituents of an index. The managers of the fund have far lower expenses, and the charges to investors are lower than for active funds.

Active funds have a loftier ambition - they aim to outperform the market average by seeking out stocks that will provide superior total return. Their fund managers have access to extensive research and analysis to help them make the right choices, and one of the consequences of this effort is that the management charges passed on to investors in the fund tend to be higher.

Advocates of passive funds point to the fact that many actively managed funds fail to match the index, let alone beat it. Advocates of active funds argue that the more investors there are investing in index funds, the more opportunity there is for active investors to be selective and invest in outperforming shares.