Investors Unsure over Passive or Active Funds

Many investors do not know the difference between active and passive investments, a new survey claims.

Four out of five investors have little idea about the two and their knowledge is only marginally better than those who have no investments at all, according to Invesco Perpetual.

Passively managed funds aim to mirror the progress of a stock market index by buying and selling shares in the same proportions as represented on the index.

But some 22 per cent of investors wrongly believe that passively managed funds offer low risk investments whilst a further 13 per cent thought they meant that the manager holds onto the stocks for as long as possible. Seven per cent wrongly believe that passive funds are managed by part time managers.

In contrast, actively managed funds aim to outperform and generate better returns than a benchmark index, such as the FTSE 100.

But over one in five wrongly thought that actively managed funds simply involved daily stock trading whilst nearly one in ten believed they aim to outperform by investing in riskier stocks.

Rick White, Marketing Director at Invesco Perpetual, said: "The fact that so many investors do not know the difference between these two very different investment styles is extremely worrying.

"A lack of understanding when making investment decisions can result in the wrong choices and ending up with an imbalanced portfolio. Whilst we believe there is a place for both investment approaches within a portfolio, investors need to make informed decisions about the funds they are buying.

"It is clear that more help needs to go into educating today’s investors to understand exactly what they are investing in. There is certainly a strong role for advice as well as clearer information provision for the future - financial advice is a crucial element in improving understanding and buying/selling decisions for the majority of investors."