Active vs Index
Actively managed investment options are where a team of investment managers aim to outperform the stock market and manage market risk by adjusting your portfolio. This includes trading shares, bonds, or other assets relevant to your option, and making regular investment decisions on your behalf.
This doesn’t generally happen in index options. Instead, your money is invested with the aim of replicating the returns of the market that you’ve invested in, as represented by the index. For example, if you opt for an Australian shares index, shares will be bought (and sold) for you with the aim of closely tracking the market of the index, like the S&P/ASX300.
Once you’ve chosen what to invest in, your investment outcome should simply follow the market return, be it up, or down. This is where understanding risk is important.
When you choose an index option, you aim to get the market return. This is great when markets are rising, but if markets fall, so will the value of your investment. Because the option is not actively managed, the risks are not managed as the index option will follow the market during a market fall.
The benefits of index investing can include low fees, simplicity and cost-effective access to the market covered by the index.
