Active management is an investment approach where a fund manager utilizes their expertise to select portfolio investments and determine when to buy, retain, or divest assets. The objective is to surpass market index performance or minimize losses during market declines.
What is active management in investment?
Active management is an investing approach that involves a fund manager who manages an investment portfolio with an aim to provide investors with a higher return than the market or benchmark.
This approach believes that an experienced portfolio manager can identify inefficiencies in the market by tracking indices, stocks, and other securities. When there are market inefficiencies, they would correct the inefficiencies over time and move towards the equilibrium. Fund managers identify inefficiently priced stocks, invest in them, and make a profit over time.
Suppose, a fund manager identifies mispriced stocks and other securities. He/she can profit from the price correction by employing an investment strategy. But how? Let us explore.
A qualified and experienced fund manager can identify undervalued or overvalued stocks. Once identified, two things can be done to make a profit:
- A fund manager buys undervalued stocks and holds them for a certain period until the price corrects to its actual value.
- In the case of overvalued stocks, fund managers short-sell them now to square them off at a later date to make a profit.
Active management in investment is often used by fund managers to modify the associated risks. They adopt the right strategy to create less volatility in the portfolio in comparison to the benchmark.
If you want to outperform a market index (say, Nifty or Bank Nifty), you can adopt an active management strategy. It will help to create a portfolio that provides you with a better return than a benchmark or market index. Active management needs special skills from fund managers. That’s why the cost of active management is higher than passive management.
You may explore the Bajaj Finserv Platform to explore 1000+ actively managed mutual funds. You may choose to invest in one or multiple mutual fund schemes to diversify and get the best return.
What is the process of active management?
There are 3 steps in the active management process:
- Planning
- Execution
- Feedback
Step 1: Planning stage
In this stage, an investor’s profile is created. It will assess an investor’s:
- Risk profile
- Expectations of the return
- Need for liquidity
- The time frame of investment
- Tax issues
- Legal and regulatory requirements
After assessing thoroughly, the fund manager creates your IPS or investment policy statement. It includes:
- Reporting requirements
- Rebalancing guidelines
- Investment communication
- Fee of the fund manager
- Strategy and style of investment
The planning stage also requires the fund manager to create the basis for the portfolio. It will include:
- The formation of capital market expectation
- Make expected forecasts for the risk-return profile of the stocks and other securities
Finally, the allocation of assets in a portfolio should be chosen strategically. It will be done as per the asset class weightage.
Step 2: Execution stage
This stage requires the fund manager to implement the portfolio and optimise it when required. Per the expectations of the investor, the active manager would choose and buy stocks for the portfolio. To achieve projected ROI (return on investment) as per the risk profile and objectives, the fund manager will optimise your portfolio by efficiently combining assets.
Step 3: Feedback stage
Rebalancing your portfolio is essential in active management to outperform benchmark indices. When you find any underperforming stock or security, you have to sell it and replace it with any prospective one for a better return. This will ensure that your portfolio fulfils the IPS mandate.
As an investor, you should evaluate the performance of your portfolio from time to time. This will ensure that your investment and financial goals are fulfilled as per your expectations.
You may check the lumpsum calculator or the SIP calculator to compare mutual funds on the Bajaj Finserv Mutual Fund Platform for assessing your mutual fund’s performance.
Top 3 Strategies of Active management
Below mentioned are the strategies for Active Management:
Strategy 1: Choosing the right stock
An essential part of the active management of funds to outperform benchmark indices is to choose the right stocks. You will have to identify the undervalued or overvalued stocks and then invest in them or short-sell them to make a profit. A fund manager usually carries out fundamental analysis, quantitative analysis, and a top-down approach to identify undervalued or overvalued stocks.
Strategy 2: Sectoral rotation
A fund manager can outperform the return from benchmark indices by adjusting portfolio allocations according to the economic outlook, changing market conditions, and thematic investing. You can rotate your investment among stocks from under sectors that can give you high returns in the long term. Some of them are stocks dealing with hydrogen, lithium batteries, and other renewable energy.
Strategy 3: Timing the market
Many investors make high profits by identifying market trends and patterns of various stocks. If you combine historical price and volume data along with technical indicators and chart pattern analysis, you can forecast supports and resistances. With the help of technical analysis, contrarian investing, and sentiment analysis, you may time the market while investing to make a profit.
Summary
Fund managers usually use a combination of various investing strategies to outperform the benchmark indices such as Nifty, Bank Nifty, or others. The success of active management in investment depends upon the quality of financial analysis, risk management, choice of stocks in the portfolio, investment timing, and proper rebalancing.
If you want to beat the market, mutual fund investing can be the right choice. Have you checked the Bajaj Finserv Mutual Fund Platform? You will find more than one thousand mutual fund schemes to choose from. Either make a lumpsum investment or a SIP investment to get a high return on your investment. What are you waiting for? Start investing now to get maximum return in the long run.
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