Deciding if you would prefer your investment ‘actively’ or ‘passively’ managed is an important consideration and a useful step towards narrowing your choice of funds to invest in.

Are you looking for a fund that will be impacted by an individual fund manager’s choice of investments? Or would you prefer to keep charges lower and invest in something that simply reflects the performance of a major index, such as the FTSE 100?

Active funds typically have higher annual management charges than passive funds. This reflects the investment managers’ potential to outperform the market, and they are managed with the aim of generating returns greater than the relevant markets, as measured by an index – known as its ‘benchmark’. The index contains the companies whose shares are being bought and sold daily by the fund. All equities belong to at least one index depending on the location of the company and the type of business.

The passive management style of investing is called ‘passive investing’, also known as ‘tracking’. A passive, or index-tracking, fund is managed with the aim of replicating the performance of a specific index.

Passive investment funds track a market and charge less in comparison to an active fund. To track the FTSE 100, for example, an investment manager will aim to invest in the same shares, in the same proportions, as this index. Passive fund managers won’t make any ’active’ decisions, as they’re only trying to match the index. The fund will generally rise and fall with the index. Typically, the fund will buy all the stocks in, for example, the FTSE 100 in the same proportion they represent in the index.