Thursday, December 23, 2010

Passive Fund

A passive fund is an investment fund which aims to replicate the returns of e.g. an index. For example a passive equity fund might be based on the S&P 500, thus the fund would hold a basket of shares in proportion to their weighting in that index. The term passive is used because the strategy of the fund is determined by hard rules and is pre-set; in other words there is no scope for the fund manager to make active decisions. The contrasting term or style is active management, whereby the fund manager will seek to add value to returns by picking stocks, timing the market, shifting between asset classes, etc. Passive funds therefore generally have lower fees because the operation of the fund tends to be more robotic and automatic, and the value proposition requires maximum efficiency in terms of expenses.

Synonyms: Index fund, Rules based fund, Index based fund, Passive manager, Passive equities

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