Glossary > Finance > Investments > Mutual Funds

Active Management

Active management in finance refers to the practice of using professional money managers to actively buy and sell investments within a portfolio, in an attempt to outperform a specific market benchmark or index. These managers make decisions based on research, market trends, and individual securities' performance, aiming to generate higher returns for investors.

Example #1

For example, a mutual fund that employs active management may have a team of investment professionals actively selecting and trading assets within the fund to try and beat the returns of the overall market or a specific index.

Example #2

Another example could be a hedge fund that engages in active management by frequently adjusting its portfolio holdings based on the fund manager's forecasts and analysis.

Misuse

Misuse of active management can occur when fund managers engage in excessive trading, leading to higher fees for investors without necessarily delivering better returns. This practice can erode the overall performance of the fund and reduce investors' net gains. It's crucial to protect against such misuse to ensure that investors are not misled by false promises of outperformance that come at a high cost.

Benefits

One of the benefits of active management is the potential to achieve returns that surpass the average market performance. Skilled fund managers may be able to identify opportunities for growth and beat the market through their expertise and research. This could result in higher profits for investors compared to just passively tracking an index.

Conclusion

While active management offers the potential for higher returns through expert decision-making and market insights, consumers should be cautious of high fees and ensure that fund managers act in their best interests. Maintaining transparency and monitoring performance are essential to safeguard against potential misuse or underperformance.