Differences Between Active and Passive Funds (Index Funds)


The basics of investment funds were introduced in a separate article the other day, but in this article, I will introduce the types of investment funds.

If you would like to know the basics of investment funds, please read the following article first.

There are various ways to classify investment funds, but in this article, I will classify investment funds into two categories from the viewpoint of management methods: active funds and passive funds (index funds).

First of all, please check the difference between active funds and index funds in the table below.

 Active FundsIndex Funds
ObjectivesTo select and invest in stocks based on their own themes, etc., and to obtain operational results that exceed the indexTo move in the same way as indices such as the S&P 500 and Nikkei Stock Average
PortfolioCarefully select excellent stocks through research and analysisSimilar or same composition to a specific index
FeeRelatively high
(transaction costs due to frequent buying and selling, labor costs for fund managers, analysts, etc.)
Relatively low
FeaturesThere are various types of funds based on various theme and purpose, and you can achieve better performances above the index if you find a good active fundyou can invest in the entire market at low cost and in line with the index, transparency of stocks in funds is high, and it is easy to obtain information because most of funds are linked to well known indices

Active Funds

Active funds are investment funds that aim to achieve better results than the benchmark index.

In general, as benchmarks, indices such as the Nikkei Stock Average and TOPIX in the Japanese market and the S&P 500 in the U.S. market are often selected.

In active funds, in order to aim for higher investment results than the benchmark index, management experts called fund managers make investment decisions, investigate and analyze various companies through company interviews, etc., determine the incorporated stocks of the portfolio, and actively buy and sell them.

Fund managers invest in investments that are expected to grow in the future. Also, in the stock market, some companies are not properly evaluated in their value, so the fund managers invest in those companies to expect high returns.


Active funds aim to outperform benchmark indices, so if the market is up, you can expect higher returns than index funds.

In addition, even if the entire market is down, experts can adjust its portfolio so that it does not fall significantly below the benchmark.


In active funds, various experts, such as fund managers who are actually in charge of fund management, analysts specializing in corporate research, and strategists who develop investment strategies, are involved. They gather information and make investigation and analyze, actively buy, sell, and replace stocks in the portfolio.

Therefore, there is a disadvantage that the cost of asset management tends to be expensive.

Because it is operated by experts, the skills of each fund manager are directly linked to the fund management results.

In addition, since there are many types of financial instruments to be invested in, the operating results are quite different fund by fund.

Thus, in active funds, high returns are expected, but risks of losses are high.

Index Funds

An index fund is an investment fund that aims to achieve the same result with a specific index.

In general, as benchmarks, indices such as the Nikkei Stock Average and TOPIX in the Japanese market and the S&P 500 in the U.S. market are often selected.

Index funds are mechanically operated to achieve benchmark results.


Index funds manage assets in conjunction with specific benchmark indices, which has the advantage of being easy to understand how to manage them.

In addition, since it is operated mechanically with the aim of the average value of the market, compared to active funds, costs are relatively low, and there is little risk that the operational performance will be affected by the skills of experts.

Since it is easier to invest than active funds, it can be said that index funds are suitable for investment fund beginners.


One of the disadvantages is that there are a few fund products that have adopted management as an index fund.

Since it takes an investment method linked to the benchmark index, the operating performance will not change significantly from the benchmarked index you choose.

In addition, the lower risk means the lower return, so investing in the index fund might be not as interesting as active funds that aim for a large return.

Which is Better After All?

I mentioned the characteristics, advantages, and disadvantages of active funds and index funds, but I can’t say which is superior to the other. The appropriate fund management method will differ by investors to investors, depending on their situation and thinking.

However, John Bogle of Vanguard, the founder of the index fund, says in his book that the probability of active fund success is very low, and that if you observed 355 active funds that existed in 1970 for more than 45 years, only two have really provided excellent performance.

As a result of the observations, 281 active funds out of 355 disappeared from the market, most of which had terrible investment results. 29 of the remaining active funds had operating results more than 1% below the S&P 500 per year, and the other 35 active funds had returns less than 1% deviated from the return of S&P 500.

In other words, compared to the benchmark S&P 500, only 10 active funds performed 1% better than S&P 500 annually, and of the 10 funds, eight outperformed the S&P 500 by less than 2% a year.

Warren Buffett, the most well know investor in the world, also advises investing 90% of his wife’s legacy in S&P 500 index funds.

Therefore, for those who have little knowledge and experience in investing and want to improve their investment performance firmly, a index fund would be a better option. On the other hand, those who have a plenty of investment knowledge and experience and can tolerate high risk, investing with active funds would be good.