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What are Passive and Active Funds?

Wednesday 23rd January 2002

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Q: A friend has suggested that I put some money into a managed fund, but says to make sure that it is an active one to get the best return. Can you explain the difference?

A: A Passive Fund tracks an index, such as the NZSE10, and movements in the index reflect in the value of your units. An Active Fund is one where a fund manager attempts to buy and sell different shares to (hopefully) outperform the market by selecting shares that will outperform the benchmark that the fund sets for itself.

Passive funds have lower management fees because the shares in the fund match the shares in the index in the same percentages as the index. For example, if Telecom makes up 30% of the NZSE10 then the TeNZ fund will hold 30% of its shares in Telecom. Passive Funds have lower fees than Active Funds because there is less work involved for the fund manager.

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