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Glossary > Finance > Investments > Mutual Funds
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Passive Management

Passive management, also known as passive investing, is a strategy where an investment portfolio is designed to mirror the performance of a specific index or benchmark. It involves minimal buying and selling of assets, aiming to match the overall market performance rather than actively trying to outperform it.

Example #1

For instance, an investor who follows a passive management strategy may invest in an index fund that replicates the S&P 500 index. By doing so, they seek to achieve returns that closely track the performance of the overall stock market represented by the index.

Example #2

Another example could be an investor opting for an exchange-traded fund (ETF) that mirrors the performance of a specific sector, such as technology or healthcare. This hands-off approach allows the investor to benefit from the sector's growth without engaging in active stock picking.

Misuse

An example of misuse in passive management could be when a financial advisor claims to provide passive management services but excessively trades the client's portfolio, increasing fees and potential tax implications. It's crucial to protect against such misuse to ensure clients receive the benefits of passive investing, such as lower costs and reduced portfolio turnover.

Benefits

One significant benefit of passive management is lower costs. Since there is minimal trading involved, fees associated with passive investments are typically lower compared to actively managed funds. Additionally, passive investing provides broad market exposure and can help diversify a portfolio without the need for continuous monitoring.

Conclusion

Passive management offers a straightforward and cost-effective way for investors to participate in the financial markets while aiming to match the performance of a specific index or sector. By understanding the benefits and staying vigilant against potential misuse, consumers can make informed decisions aligned with their investment goals.

Related Terms

Index FundETF (Exchange-Traded Fund)Active ManagementDiversification

Last Modified: 4/30/2024
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