Passive Funds: Breaking down the basics

With Christmas and the New Year approaching fast, it’s time to start thinking about the pounds you want to gain… and of course (in true My Pension Expert fashion) we are referring to pound sterling!  

This time of year is a great opportunity to take stock of your finances and consider plans for the coming year, and beyond. And within this planning, it’s important to consider which options suit your needs. For some, that may involve investing.

Investing can be an essential part of retirement planning as it can help your pension to work that little bit harder. There are two primary investment strategies, active and passive, and understanding the difference between the two could help you understand if either type could help you.

But what exactly are the differences? Luckily for you, we’re here to break it down.

Active Vs. Passive

There’s an easy way to describe the difference between active and passive funds – a hands-on experience and a laid-back look.

A hands-on experience, or an active fund, is fast-paced. Active funds involve a ‘fund manager’ picking and choosing investments with the aim of outperforming the benchmark (these are used to evaluate how the portfolio typically performs). Fund managers use their knowledge and expertise to adjust portfolios based on market trends, which could bring a higher return.

However, as ideal as this may sound, there is also the potential for this to be costly due to the higher fees active fund Managers typically require. On top of that, active funds themselves can carry the potential of being at higher risk. With an active fund, you’re more exposed to market volatility and potential losses.

A laid-back look, or a passive fund, is slow and steady. Passive funds are a low-cost investment option that tracks the performance of market indices, such as the FTSE 100. These funds are simpler, and you don’t have to pay a fund manager for research, trading costs, or analysis!

Of course, with all investments, passive funds still carry the risk of potential losses. These funds might have a limited potential, as there isn’t anyone looking over them. Similar to active funds, market volatility means there could still be losses during market downturns.

Is it right for you?

Now that we understand the difference, which one is the option for you? Choosing between active and passive funds depends entirely on your goals, attitude to risk and your personal circumstances.

Like most, you may be new to the world of investing, and it can be intimidating, especially since this is your retirement we’re talking about! If you’re interested in dipping your toes into the investment pool, passive investments could be a fantastic way to start.

Passive funds typically have a low annual management fee. The manager doesn’t choose specific investments but rather, the fund mirrors the index that’s being tracked. Whilst it’s replicating the market performance, the returns will also be similar, even after taking the account management fees away.

The funds are also more diversified, as they track a broad market index. So, should one investment in the fund perform badly, this performance can be evened out by other investments within the fund – it does not necessarily mean that the value of your fund. Although your pension may be invested for many years, passive investing enables it to grow in the long term can be beneficial for riding out those pesky periods of market volatility.

How we can help you

Now, this article can’t tell you exactly what will work for your money because everyone’s circumstances are unique. So, whether you’re ready for a hands-on experience or prefer a smooth and steady ride, we at My Pension Expert can offer a helping hand. All investments have risks and potential losses, which is why advice is key when making decisions that could potentially affect your future income.

Indeed, advisers, like our expert team, can help you understand how much risk you feel comfortable taking on in your retirement strategy, and advise you as to which retirement route suits your needs. Additionally, they take the time to understand what is important to you, so you can be confident that your recommendation is tailored to you – whether that’s a recommendation to follow the passive or active fund route, or even an annuity.

Our qualified independent financial advisers can tell you about the range of options available to you – so that you can achieve the retirement YOU want.