Active fund management is also known as an active investing in financial markets. This is all about a portfolio management strategy where managers do some specific investments. Investments are done to achieve the top benchmark index to earn maximum profits. Outperforming the benchmark index through a manager is the main objective of an active fund management.
It is totally different and opposite of a passive fund management process. In a passive fund management a manager does not want to outperform the benchmark index. Sometimes, investors and mutual funds do not seek to join in excessive returns or profit from benchmark index and invest only in index funds. They do this and try to make an exact copy of the investment weighting and returns of that particular index. Active fund management is just opposite of this.
The primary advantage of an active fund management is that it provides a number of selection and investment options to invest than strictly or solely investing only in a market as a whole. Through this fund management investors will find some market segments as inactive and some are more active to invest and creating profits.
A manager in an active fund management can invest or manage volatility of market returns by investing in high-profile companies and by taking less-risk. This can be done even in relatively lower returned stocks or financial assets than to stick with a financial market as a whole. Thus, investors can always expect the highest returns from funds than normal market returns.
Let us take case to understand active fund management clearly. For example, consider there is an employee from I-ball Company. He gets regular shares or stocks from company as benefits. He can have additional funds in his account by investing in I-ball. But, I-ball shares or stocks does not remain same and also fluctuates like share market. In this case the employee from I-ball might not prefer invested only for his industry. Now, with the help of active fund management he can invest for those industries which remain in high return positions in market. Thus, investors get the option to invest only with the top-class companies with top-class returns.
There is no doubt that the effectiveness and higher returns from active fund management depend only upon the skill of a manager. But, the performance is also based on the research staff and on the term “active”, how is it presented. Many managers take up hedging strategies to eliminate risk when market goes down under active fund management. On the other hand, some managers decide to stay fully invested even at the time of downward market conditions. Thus, these two different attitudes hold active fund management and determine the effectiveness.
On the other hand, in most real active fund management managers become board members and directors. This means that there is no direct impact or role of directors or board members with an active fund management. In a real active fund management everybody has same objective to follow that is to procure maximum earning. Thus, with a single proprietorship private equity or private firm enter in a real active fund management. Here, the owner of the private company reserves decision to invest for various mutual funds options with active fund management.
Actually, an active fund manager exploits or takes advantages of market inefficiencies. He or she buys undervalued financial assets or stocks or buys overvalued short-selling securities. To achieve target, managers of active fund management use a host of strategies to form active fund portfolio. Those strategies or measures might comprise quantitative measures like PEG ratio and price/ earning ratio.
Active portfolio managers also focused on investing upon long-term macroeconomic trends like energy, power and housing stocks. Some other strategies include short positions, asset allocation, option writing and merger arbitrage. Active fund management is also done by purchasing companies’ stock or shares that are out-of-favor temporarily. That is done by active fund managers with companies’ intrinsic value of stocks by selling at a discount.
But, it is important to get aware about some disadvantages of active fund management. Active funds’ return or earning might be diminished by higher transaction value which derives from frequent trading in markets. A handsome earning might never come when a manger takes wrong decision to invest in wrong ways. Here, the higher fees with active fund management might create lots of trouble with return when taken wrong decision by managers.