Active vs Passive Funds: An Overview
- Active funds aim to outperform the market through the decisions of a professional fund manager.
- Active funds tend to outperform during periods of high market volatility or in specialised sectors.
- Passive funds aim to replicate the performance of a specific index (such as the FTSE 100) and have lower fees.
- With increasing sophistication and accessibility, passive funds have grown significantly in popularity in recent years in the UK.
- As of 2025, passive investments account for almost 50% of total fund assets in the UK, although active funds continue to dominate in certain sectors.
- Choosing between active and passive funds depends on your attitude to risk, investment timeframe, willingness to pay fees, and your views on market efficiency.
Active vs. Passive Funds: what they are and how they differ
When investing in funds, one of the most frequently asked questions is about the difference between “active” and “passive” investment funds. This is genuinely one of the most frequent concerns faced by new investors when they begin exploring funds as a means of investing their money.
In this guide, we explain what investment funds are, clarify the difference between “active” and “passive” funds, examine how they differ in detail, and help you determine which option may be best suited to your financial goals in 2025.
What are investment funds?
Investment funds are vehicles that pool money from multiple investors to purchase a diversified portfolio of assets such as shares, bonds or other securities. Instead of purchasing individual shares, you buy a stake in a fund and gain access to a broader portfolio: an ideal solution for reducing risk and gaining access to professional management.
There are two main types of investment strategies for funds: active and passive.
Active funds: what they are and how they work
Active funds are managed by professional investment managers who decide which assets to buy, hold or sell in an effort to outperform a market benchmark (such as the FTSE All-Share Index).
Key features:
- Active portfolio management: managers rely on research, forecasts and market analysis to identify the most profitable investment opportunities.
- Objective to outperform the market: managers aim to deliver returns above the market average.
- High degree of flexibility: active managers can respond swiftly to market developments.
- Higher fees: reflecting the cost of ongoing active management.
Active funds may perform better during periods of high volatility or in sectors where information is limited. However, they also carry the risk of underperformance due to poor decision-making or higher fees that can erode returns.
Passive funds: what they are and how they work
Passive funds – including index funds and ETFs (Exchange-Traded Funds) – aim to track the performance of a specific index rather than beat it.
Key features:
- Automated management: there is no active manager making frequent investment decisions.
- Transparency: the fund’s holdings are clearly disclosed from the outset and remain consistent over time.
- Market-level returns: while you won’t exceed the market average, you are also less likely to underperform.
- Lower charges: the absence of active management results in lower ongoing fees compared to active funds.
Passive funds are valued for their simplicity and cost efficiency, especially by long-term investors who believe that markets are efficient over time.
| Feature | Active funds | Passive funds |
| Management | Active management by professionals | Automation, no active manager |
| Strategy | Seek to outperform an index | Aim to replicate an index, without seeking to beat it |
| Flexibility | High: can adapt quickly to market changes | Low: fixed structure, closely tracks the index |
| Charges and fees | Higher, to cover analysis and management costs | Lower as a result of the absence of active management. |
| Anticipated returns | Potentially higher than the market, but also with the risk of underperformance | Performance in line with the market, without excesses or disappointments |
| Transparency | Lower: portfolio composition not always clear | High: composition known and constant |
| Effectiveness in volatile markets | Can be more effective due to their capacity to respond to market changes | Less effective: they follow the index even when it is falling |
| Ideal context | Volatile markets or sectors with scarce or difficult to interpret information | Long-term investments in markets considered efficient |
Active or Passive Funds: Which Should You Choose?
There is no one-size-fits-all answer: the choice between active and passive funds depends on personal preferences, investment objectives, and the level of involvement you are comfortable with.
Reasons to Consider Active Funds:
- You believe in a fund manager’s ability to identify the best opportunities in the market.
- You are interested in niche markets or emerging sectors.
- You are prepared to pay higher fees in exchange for the potential of enhanced returns.
Two things to watch out for:
- Higher charges can significantly reduce your net returns.
- Many active funds underperform their benchmarks after fees.
Ultimately, performance depends heavily on the manager’s decisions.
Reasons to Consider Passive Funds:
- You favour a low-cost, straightforward investment approach.
- You are satisfied with matching average market returns over the medium to long term.
- You prefer predictability and transparency.
Three things to watch out for:
- You will never beat the market.
- During a downturn, passive funds will follow their index downwards.
- They offer limited flexibility for defensive positioning in volatile markets.
Active vs passive funds: trends for 2025
In 2025, several clear trends are emerging in the investment fund landscape:
- In the UK, passive funds account for around 48% of all retail fund assets, up from 43% in 2023 (source: Investment Association, UK Fund Market Report).
- ETFs continue to gain traction, particularly among younger investors attracted by low fees and trading flexibility.
- Active managers are increasingly focusing on ESG (Environmental, Social and Governance) strategies and thematic investing, areas where passive managers may struggle to keep pace.
Overall, the gap between active and passive funds is narrowing. Many active funds still outperform in specific sectors, but the difference in returns is becoming more marginal as passive funds grow increasingly sophisticated and accessible.
Takeaways to remember
- Both active and passive funds can serve as effective investment vehicles – the key is aligning them with your personal strategy.
- Active funds offer flexibility and the potential to outperform, but they come at a higher cost.
- Passive funds are simpler, more transparent, and typically lower in cost – but they mirror the market and do not aim to outperform it.
- By 2025, passive funds are expected to have almost equal market share to active funds, reflecting growing confidence in index-based investing.
- The right choice depends on your time horizon, risk appetite and how involved you want to be.
If you are still unsure which approach is best for you, consult an authorised financial advisor who will be able to draw up a plan tailored to your goals and risk appetite, including active funds, passive funds or a combination of both.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
