Definition
The term active fund refers to an investment strategy that relies on forecasts, research, and proprietary models when selecting securities to buy or sell. The objective of active funds is to find securities that are currently undervalued and will outperform the market in the near term.
Explanation
Also known as an actively managed fund, the management team of an active fund believes it is possible to outperform the market over the long term. This is accomplished through research and the team's judgement. Individuals that invest in an active fund do not believe in the efficient market hypothesis, which states the current market price of a security fully reflects all of the available information.
The objective of an active fund is to outperform passively managed funds, which buy and sell securities using an indexing strategy. Since the management team of an active fund is constantly seeking to buy securities they believe are undervalued, and sell securities they believe are overvalued, the fees associated with these funds will reflect higher transaction costs.
While the ability to beat the market is appealing to many investors, a number of studies conclude index funds outperform between 75% and 90% of active funds. Investors choosing active funds should have relatively high risk tolerance scores, since the fund's management team will be aggressively seeking securities with the potential to provide above-average returns.
Related Terms
The term fund of funds refers to a portfolio of mutual funds held by a single mutual fund. The objective of a fund of funds is to provide investors with diversification within a specific asset allocation framework.
Moneyzine EditorJanuary 18th, 2024
The term asset allocation fund refers to a portfolio of equities, bonds, and cash equivalents in a proportion that fulfills a specific investment objective. The allocation of assets in these funds can remain fixed or they may vary over time to fulfill its objective.Moneyzine EditorJanuary 5th, 2024- The term passive fund refers to a portfolio of securities that are thought to mirror a market index such as the S&P 500. The objective of passive funds is to find securities that will provide investors with a return equal to the index that the fund's managers are attempting to replicate.Moneyzine EditorSeptember 20th, 2023
The term go-go fund refers to a portfolio of high-risk securities that attempts to provide investors with above average returns. While the stated objective of a go-go mutual fund is to provide individuals with higher than average returns, there is considerable risk associated with these investments too.Moneyzine EditorJanuary 19th, 2024
