Taking the passive or active route

Active fund managers try to predict a market that is essentially random. This means they put a lot of resources into stock picking, market forecasting and the like, often without reward.

Passive investors turn this around. They say forget about trying to outsmart the market, and instead focus on diversification, which is the most cost-effective way to minimise the volatility of one's returns. The passive approach also has a big advantage over active investing: it's cheaper.

An actively managed mutual fund involves a lot of research and support staff. After all, their job is to pick the securities that the rest of the market has overlooked. It's an incredibly difficult job involving a lot of cost. Many actively managed funds underperform the general market they target. An investor might ask why take on this greater risk for additional cost?

Moreover, an active fund may be prone to underperformance in periods of volatility. Active managers are tasked with the difficult job of timing the market. If they get this timing wrong, they may find themselves trying to exit large positions during a big market sell-off, which can easily result in losses.

Passive funds offer a low-cost alternative. If you want exposure to the Hong Kong market, you can buy a fund tracking whichever index you choose. This is a straightforward job that most funds can handle well with minimal expense for investors.