Understanding active funds: Meaning, types, benefits

Just like a seasoned adventurer equipped with tools and supplies can tackle uncertain terrains, active funds navigate the dynamic markets through strategies that have the potential to generate alpha for investors. Thus, active funds map out opportunities and allow investors to actively engage with the market.
In this article, we will unveil the concept of active funds, explore their different types, check out their benefits, and discuss the essential factors to consider before investing in them.

What are active funds?

Active funds, also known as actively managed funds, are investment vehicles where professional fund managers actively select and manage a portfolio of securities. Unlike their passive counterparts (index funds or exchange-traded funds), active funds don't simply mimic the performance of a particular market index. Instead, they engage in active decision-making and strive to outperform the market through the experience of a fund manager.
Therefore, active fund managers monitor and adjust the fund's holdings with the aim of seizing market opportunities as they arise. The main objective of fund managers is to work towards maximising returns for investors.

Types of active funds

Active funds comprise various categories, each with its own unique characteristics and investment strategies. Let us explore some types of active funds:
Equity funds: These active funds focus primarily on investing in stocks – for example, large-cap funds, mid-cap funds or small-cap funds. They can further be categorised based on the investment style, such as growth funds that seek companies with high potential for future expansion, or value funds that target undervalued stocks with the expectation of future growth.

Bond funds: Bond funds invest in fixed-income securities, such as government or corporate bonds. These funds aim to provide a steady flow of income and can be tailored to suit different risk appetites, ranging from conservative to more adventurous.

ELSS funds: These funds invest at least 80% of total assets in equity and equity-related securities. They are eligible for tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961 and have a three-year lock-in period.

Sector funds: These active funds concentrate their investments in specific sectors, such as technology, healthcare, energy, etc. The minimum investment in equity and equity-related instruments of a particular sector/particular theme is 80% of total assets. Sector funds allow investors to capitalize on opportunities within targeted industries, offering the potential for focused growth.

Advantages of investing in active funds

Investing in active funds has many advantages that make them an enticing option for many investors. Some of them are mentioned below:
Active risk management: With experienced fund managers at the helm, active funds possess the ability to adapt swiftly to market conditions. They conduct research and analysis to identify undervalued opportunities and actively adjust the portfolios, aiming to outperform passive funds and generate relatively better returns.

Flexibility and agility: Active funds possess the freedom to explore a broad spectrum of investment opportunities, giving them the flexibility to buy securities with potential. This dynamic approach allows active funds to navigate the ever-changing market landscape and seize potential growth prospects.

Potential for alpha: Alpha refers to the excess return earned by a fund above the return of its benchmark. Active funds strive to generate alpha with the help of market insights, and strategic decision-making.

Tax management: An active fund advisor can alter tax management strategies to suit individual investors. They can advise to sell investments that are losing money to offset the taxes on the profit earning investments.

Factors to consider while investing in active funds

While active funds offer enticing prospects, it is crucial to consider certain factors before embarking on this investment path:
Fund manager’s expertise: Assessing the track record, experience, and investment approach of the fund manager is vital. A skilled and knowledgeable manager with a proven ability to consistently deliver strong performance can enhance the prospects of the fund.

Fund philosophy and strategy: Understanding the investment philosophy and strategy of the fund is essential. Evaluate if it aligns with your investment goals, risk tolerance, and time horizon. A clear and transparent strategy can provide confidence and clarity to investors.

Fees and expenses: Consider the expense ratio and fee structure of the fund to ensure it is reasonable and commensurate with the value provided by the active management.

To conclude, active funds offer a great avenue for investors seeking dynamic opportunities and the potential for relatively better returns. By actively managing portfolios, employing expertise, and capitalising on market opportunities, these funds strive to make higher returns for the investor. However, it is essential for investors to conduct thorough research, evaluate the fund manager’s expertise, and align investment strategies with personal goals and risk tolerance for the optimum results.

FAQs:

What factors should I consider when selecting an active fund?

Before you select an active fund, you must take into consideration various factors such as the fund’s investment objective, portfolio composition, and fund manager’s experience. You can consider seeking the help of a financial advisor to make an informed decision.

Are active funds suitable for long-term investing or short-term investing?

Active funds can be suitable for both long-term and short-term investing. In case of long-term, active funds have the potential to generate relatively stable returns, but they may also experience period of underperformance. Short-term investing in active funds may require careful monitoring of fund’s performance and market conditions.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.