Investment guide
Active or passive investing?
Active and passive funds take different approaches to investing. Passive funds generally aim to track a market or index. Active managers make investment decisions in an attempt to achieve a stated objective, which may include outperforming a benchmark.
Passive investing
Passive funds generally aim to follow a market rather than select individual winners.
A passive fund may track an index such as a broad equity or bond-market benchmark. Instead of a manager continually deciding which securities should outperform, the fund seeks to reproduce the performance of its chosen index, before charges and tracking differences.
Broad exposure
One index fund can provide exposure to many underlying companies or securities.
Rules-based
Holdings are largely determined by the index methodology rather than ongoing discretionary stock selection.
Often lower cost
Passive funds frequently cost less to run than comparable actively managed funds, although charges still vary.
Tracks the market
If the market being tracked falls, the passive fund will generally fall with it. Passive does not mean low risk.
Active investing
Active managers make deliberate investment choices.
An active manager researches and selects investments according to the fund's mandate. Depending on the objective, the manager may seek to outperform a benchmark, manage risk differently from the market, generate income or pursue another stated outcome.
The result can be meaningfully different from the benchmark — positively or negatively.
An active manager can underperform the relevant market, and higher management costs create an additional hurdle that must be overcome before investors benefit from superior net returns.
Comparison
The approaches solve the investment problem differently.
| Feature | Passive | Active |
|---|---|---|
| Primary approach | Track a chosen index or market. | Manager selects investments to pursue a stated objective. |
| Manager discretion | Generally limited by index rules. | Greater discretion over holdings and positioning. |
| Cost | Often lower, though not always. | Often higher because of research and active management. |
| Relative performance | Designed to broadly follow the chosen market before costs and tracking differences. | Can outperform or underperform the benchmark. |
| Manager risk | Less dependent on individual security-selection decisions. | Outcome can depend materially on the manager's decisions and process. |
Charges
Cost matters because investors receive returns after charges.
Passive funds often have lower ongoing charges because they do not require the same level of ongoing security selection and research. Active funds can cost more, and those additional costs reduce the return retained by the investor.
That does not mean the cheapest fund is automatically suitable. A fair comparison should consider the investment objective, exposure, risk and total cost together.
A low-cost global index fund and a specialist active fund may be doing fundamentally different jobs. Price alone does not tell you whether either belongs in a particular portfolio.
Investment risk
Both approaches can lose money.
The FCA requires investment communications to make the risks of investing clear. Whether a fund is active or passive, its value can fall and you may get back less than you invest.
Passive risk
A tracker follows its chosen market through downturns as well as rising markets and may be concentrated where the index itself is concentrated.
Active risk
Manager decisions can add value but can also produce additional losses or sustained underperformance.
Diversification, asset allocation and the overall portfolio structure can therefore matter more than simply attaching an “active” or “passive” label to individual funds.
Combining approaches
A portfolio does not have to be entirely active or entirely passive.
Some investment strategies use passive funds for broad market exposure while using active managers selectively in areas where the investor or adviser believes there is a reason to do so.
The useful question is therefore not necessarily “which approach wins?” but what role each holding performs, what it costs and whether the combined portfolio remains aligned with the investor's objectives and risk profile.
Investment planning
Want to understand how your portfolio is actually invested?
A personal review can examine the funds you hold, their role, costs, risk and diversification and whether the overall strategy still matches your financial plan.
Book a conversationThis guide is for general information only and is not personal financial, investment or tax advice. Investments can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future results. Content checked against current FCA consumer-investment guidance on 16 September 2026.