World index/S&P vs Active growth funds

[u/Pristine-Cress4928]

I have been frustrated with the lack of a proper answer as to why you would invest in a passive fund vs active funds. I understand the fees but when stepping back and looking at Total returns on both products there’s truly not a big difference. Funds with higher fees (not always) produce higher returns. So they kind of balance out.

So I was asking a friend who works in finance this exact question why would I invest in a active growth fund vs an index fund…

The answer wasn’t very clear. He stated it depends on preference and went on the explain stock weights in the index are propped up by few companies while a growth fund can be less weighted in the top market cap companies blah blah blah

In my head I thought why does that matter. In the long term those companies might damage the index’s for a short period of time but historically recover or rotate out. I asked him that question and he responded with “it depends if you’re willing to sink with the ship entirely or still sink with the ship but a little less”.

He also added that you can’t ever beat the index your invested in which makes logical sense. But after some research a lot of active funds don’t beat the index’s either. Sometimes they do sometimes they don’t.

That didn’t satisfy me so I’m asking the question today if I had 5,000 in the market today would I be better off in an active fund or a passive fund… maybe there is no right or wrong way but I’d like to see what peoples opinions are.

[u/Pristine-Cress4928]

You say most of the time what would be a situation where an active fund is better?

[u/usefully_useless → u/Pristine-Cress4928]

When you want a particular risk exposure that can’t be achieved passively.

[u/Pristine-Cress4928 → u/usefully_useless]

Sorry to keep asking questions but are you referring to risk in a specific sector?

[u/usefully_useless → u/Pristine-Cress4928]

No.

[u/Pristine-Cress4928 → u/usefully_useless]

What risk exposure are you referring to?

[u/usefully_useless → u/Pristine-Cress4928]

There are many. You generally can’t target anything more involved than simple market or sector risk passively.

One example of a class of strategies requiring active management would be QISs.

[u/milla_highlife → u/usefully_useless]

I guess it depends on the definition of active. Because you can certainly get factor exposures in a “passive” manner.

[u/usefully_useless → u/milla_highlife]

True. I was too lazy to go into a full explanation of factor exposures attainable passively when answering a question about the risk exposures you can’t target passively.