Developing and Evaluating an Investment Analysis

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In actively managed portfolios, fund managers do not believe that the market is always efficient and they are always eager to make use of such mismatch in pricing that does not discount the information completely. If an active fund manager remains successful in identifying such opportunities, it is possible to make above-average returns without exposing to higher systematic risk and thus, it is possible to outperform the market through actively managed portfolios. Information always continues to flow in the market and prices keep on fluctuating. Sometimes the information is stock specific and sometimes, some macroeconomic factors may provide direction to the market.
A disadvantage of an actively managed fund is that these funds have higher expense ratios. They also pay higher taxes as they frequently enter and exit in the market. Due to their modus-operandi, these funds may give higher returns. however, they carry higher risks too. It is also true that prices fluctuate in response to available information widely as per the perceptions of the players involved and they are mostly unpredictable. Usually, it is not possible to use the information to predict a future price.
Contrasting actively managed funds, passively managed funds to take a long term view and do not frequently enter or exit the market. The advantage is that they are less risky and pay lesser taxes in comparison to active funds. Owing to a limited number of transactions, passively managed funds spend less on transaction costs. They usually provide risk-free average returns. Passively managed funds are highly diversified to minimize market risks. Another advantage is that they are not information dependent while reshuffling their portfolios, which usually happen at a much lesser frequency.