Active Investing
An approach that selects securities in an attempt to earn more than the index return.
How it is identified
Test: holdings deviate deliberately from the benchmark on the basis of judgement, and success is measured against the benchmark net of fees
Unit
qualitative
In depth
Active management can add value, but it must overcome its own cost before it does — a fund charging 1.8% must generate 1.6 percentage points of gross outperformance simply to match a 0.2% index fund. Persistence is the difficulty: the funds that outperformed in one period are not reliably the ones that outperform in the next, so selecting a good active fund in advance is itself an active decision. Opportunity is greater in less efficient segments, which is why the case for active management is stronger in Indian small-caps than in large-caps. Judging it means comparing net returns against the total return index over a full cycle.
Worked example
A fund returns 13.4% gross against an index at 12.0%, a genuine 1.4 points of selection skill. After a 1.8% expense ratio the investor receives 11.6% — less than the 11.8% an index fund would have delivered.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Active Investing” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.