What’s the difference between active and passive investing?
- Nic Round: Chartered Wealth Manager
- Feb 13
- 3 min read
Updated: 1 day ago
What’s the difference between active and passive investing?
In the UK, active and passive investing describe two different approaches to managing money. The difference is not simply about cost — it reflects a different philosophy about markets, risk and return.
Behind this question are often practical concerns:
Should I be trying to beat the market?
Are passive funds too basic?
Are active managers worth their fees?
Does one approach reduce risk?
Understanding the distinction helps you evaluate how your investments are structured.
What is active investing?
Active investing involves a professional fund manager selecting investments with the aim of outperforming a specific market index.
An active fund manager might:
Choose particular companies
Avoid certain sectors
Adjust holdings based on research
Move allocations during changing conditions
Active funds aim to deliver returns above a benchmark, such as the FTSE 100.
Because they require research teams and active decision-making, they typically charge higher fees.
What is passive investing?
Passive investing seeks to track a market index rather than outperform it.
For example:
A passive FTSE 100 fund aims to replicate the performance of the FTSE 100.
A global index fund tracks a broad global market index.
Passive funds do not try to select winning stocks.They replicate the index mechanically.
This approach generally results in lower costs.
The cost difference
Fees are one of the most visible differences.
For example:
Active fund ongoing charge: 0.75%
Passive fund ongoing charge: 0.15%
On a £400,000 portfolio:
Active fund fee: £3,000 per year
Passive fund fee: £600 per year
Over long periods, fee differences compound.
However, cost is not the only factor.
Performance expectations
Active investing assumes:
Skilled managers can outperform the market after fees.
Passive investing assumes:
Markets are broadly efficient.
Matching the market at low cost may produce competitive long-term outcomes.
Evidence shows that some active managers outperform — but not consistently, and not all.
Passive investing guarantees market returns before fees, but never outperformance.
Risk differences
Both active and passive funds are exposed to market risk.
However:
Active funds may take concentrated positions.
Passive funds mirror market composition.
Active risk is the risk of underperforming the index.Passive risk is the risk of fully experiencing market declines.
Neither eliminates volatility.
A simple example
Imagine:
The global equity market rises 7% in a year.
A passive fund may return close to 7% minus fees.
An active fund may return:
9% (outperforming)
7% (matching)
5% (underperforming)
The outcome depends on manager decisions.
Over long periods, consistency matters more than short-term differences.
The behavioural layer
Often this question reflects something deeper:
Am I overpaying for active management?
Should I simplify?
Am I missing out by not using active funds?
Why did my fund underperform?
Active vs passive is rarely a binary decision.
Many portfolios combine both approaches.
The more useful consideration is whether the structure fits:
Your risk tolerance
Your time horizon
Your belief about markets
Your tolerance for underperformance relative to an index
A more useful question
Rather than asking only:
What’s the difference between active and passive investing?
A more grounded question might be:
Does my investment approach align with my expectations and long-term plan?
Because frustration often arises when expectations and structure do not match.
Some of the most common practical questions people ask about active and passive investing are below.
Is passive investing safer than active investing?
Not necessarily. Both are exposed to market movements. Passive funds simply track the market, while active funds may deviate from it.
Do active funds always outperform passive funds?
No. Some active managers outperform, but many do not consistently outperform after fees.
Are passive funds cheaper?
Yes. Passive funds generally have lower ongoing charges because they track an index rather than employ active research teams.
Can I combine active and passive funds?
Yes. Many portfolios use a blend of both approaches.
A calm place to think first
If you are questioning whether active or passive investing is right for you, there is rarely a need for urgency.
Often the first step is to clarify:
What level of volatility you can tolerate
What return expectations are realistic
How fees affect your long-term outcome
Evoa exists to provide that quiet thinking space — before advice, before action.
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