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Active Investment

Amit Bhattacharjee wants to know the meaning of Active Investment. We answer his query here & also tell him why we don't recommend investing in funds to pay off his loan

While going through the details of Reliance Regular Savings Equity Fund on its website, I noticed that it involves an Active Investment. Can you please clarify what is meant by 'Active Investment'? How is this style different from other styles? Would also like to know if mutual funds are allowed to do intra-day trading or not? I had taken a personal loan of Rs. 7.5 lakh to clear some old family debts. I intend to set up a SWP in one or two mutual funds for the next four years which would supplement me to pay the loan EMIs. Can you suggest two equity mutual fund schemes which may be ideal for this purpose?
-Amit Bhattacharjee

When it comes to investing, there are two styles to it - Active and Passive. Active investing is a strategy in which the fund manager is highly involved in buying and selling of stocks (in case of mutual fund). Here the aim of the manager is to beat the returns generated by the corresponding benchmark or an index.

On the other hand, in the passive style of investment, stocks are bought with a long term perspective. Here the portfolio is not as frequently churned as it is in active investing and the manager does not resort to profit booking based on short term price fluctuations. Indexing is an example of passive form of investing. An index fund invests in same stocks, in the same proportion, as in an index like Sensex or Nifty

Coming to your second query, we would not recommend you to initiate a SWP in equity mutual funds to help you pay your EMIs. If you invest one time in equity funds and then opt for a SWP, you would be assuming high market risk. If your investment value goes down over time and you withdraw funds (via SWP), you are in a way booking losses. So you can approach this in two ways. Firstly, as the interest that you will be paying on the loan would be quite high, it would be a wise decision to clear a part of the loan and save on interest. Secondly, if you wish to go the SWP way, then opt for a pure debt fund like Kotak Flexi Debt or ICICI Prudential Long Term and then opt for a SWP as they are low risk funds.

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