There are two main equity portfolio management strategies: active and passive. The active strategy involves constantly trading stocks to achieve above-market returns by identifying undervalued stocks. It requires expertise but carries high costs and risks. The passive strategy involves low-cost index investing to achieve market returns without trying to beat the market. It has lower fees and risks but also likely lower returns. In conclusion, active management aims for higher returns through stock picking while passive seeks market returns at lower cost and risk.

1. Equity Portfolio Management Strategy
Active Portfolio Strategy
Passive Portfolio Strategy
Active vs Passive
By Dr. Ibha Rani
Kristu Jayanti College, Autonomous
Bangalore

2. Equity Portfolio Management Strategy
Portfolio Management Strategies refer to the approaches that are applied for the efficient
portfolio management in order to generate the highest possible returns at lowest possible risks.
There are two basic approaches for portfolio management including Active Portfolio
Management Strategy and Passive Portfolio Management Strategy.

4. Active Portfolio Strategy
Under this method, portfolio managers actively trade in the stock market to attain
maximum returns from shares.
The strategy is ‘active’ in that it requires a constant evaluation of the market to buy assets when
they are undervalued and sell them when they exceed the norm.
Active portfolio management requires a high level of expertise about the markets.
The strategy requires quantitative analysis of the market, broad diversification, and a sound
understanding of the business cycle.
Active strategies are suited for experienced investors who have a higher risk appetite. Typically,
their allocation reflects their desire for market-beating returns, which means a higher
concentration of capital allocated to stocks.

5. Active Investing Advantages
 Flexibility: Active managers aren't required to follow a specific index. They can buy those "diamond in the
rough" stocks they believe they've found.
 Hedging: Active managers can also hedge their bets using various techniques such as short sales or put
options, and they're able to exit specific stocks or sectors when the risks become too big. Passive managers
are stuck with the stocks the index they track holds, regardless of how they are performing.
 Tax management: Even though this strategy could trigger a capital gains tax, advisors can tailor tax
management strategies to individual investors, such as by selling investments that are losing money to offset
the taxes on the big winners.

6. Active Investing Disadvantages
 Very expensive:
Thomson Reuters Lipper pegs the average expense ratio at 1.4% for an actively
managed equity fund, compared to only 0.6% for the average passive equity fund. Fees are higher
because all that active buying and selling triggers transaction costs, not to mention that you're
paying the salaries of the analyst team researching equity picks. All those fees over decades of
investing can kill returns.
 Active risk: Active managers are free to buy any investment they think would bring high
returns, which is great when the analysts are right but terrible when they're wrong.

7. The active management approach of the portfolio management
involves the following styles of the stock selection
 Top-down Approach:
 In this approach, managers observe the market as a whole and decide about the industries and
sectors that are expected to perform well in the ongoing economic cycle. After the decision is
made on the sectors, the specific stocks are selected on the basis of companies that are
expected to perform well in that particular sector.
 Bottom-up:
 In this approach, the market conditions and expected trends are ignored and the evaluations
of the companies are based on the strength of their product pipeline, financial statements, or
any other criteria. It stresses the fact that strong companies perform well irrespective of the
prevailing market or economic conditions.

8. Passive Portfolio Management Strategy
 Passive asset management relies on the fact that markets are efficient and it is not possible to beat the market
returns regularly over time and best returns are obtained from the low-cost investments kept for the long term.
 Passive Investing Advantages
 Some of the key benefits of passive investing are:
 Ultra-low fees: There's nobody picking stocks, so oversight is much less expensive. Passive funds simply
follow the index they use as their benchmark.
 Transparency: It's always clear which assets are in an index fund.
 Tax efficiency: Their buy-and-hold strategy doesn't typically result in a massive capital gains tax for the
year.

9. Passive Investing Disadvantages
 Proponents of active investing would say that passive strategies have these weaknesses:
 Too limited:
 Passive funds are limited to a specific index or predetermined set of investments with little to no variance;
thus, investors are locked into those holdings, no matter what happens in the market.
 Small returns:
 By definition, passive funds will pretty much never beat the market, even during times of turmoil, as their
core holdings are locked in to track the market. Sometimes, a passive fund may beat the market by a little,
but it will never post the big returns active managers crave unless the market itself booms. Active managers,
on the other hand, can bring bigger rewards (see below), although those rewards come with greater risk as
well.

10. The passive management approach of the portfolio management
involves the following styles of the stock selection
 Efficient market theory: This theory relies on the fact that the information that affects the markets is immediately
available and processed by all investors. Thus, such information is always considered in evaluation of the market
prices. The portfolio managers who follow this theory, firmly believes that market averages cannot be beaten
consistently.
 Indexing: According to this theory, the index funds are used for taking the advantages of efficient market theory
and for creating a portfolio that impersonate a specific index. The index funds can offer benefits over the actively
managed funds because they have lower than average expense ratios and transaction costs.
 . Investors who seek to minimize risk often prefer passive strategies. Lower cost is the primary benefit of passive
investing, as this strategy is probably the cheapest to implement. Passive strategies have also been proven to
generate consistently strong long-term gains. Passive strategies are only suitable for long-term investors.

12. Conclusion
 1. The goal of active investing is to beat the market index whereas the goal of passive investing is to get
market returns.
2. Active investing is a hands-on approach with frequent buy-sell decisions making most of information flow
and price fluctuations whereas passive investing is about researching, buying and holding the investments.
3. Active investing has higher transaction and research-related costs as compared to passive investing.

4. Active investing can also lead to higher capital gains taxation as as compared to passive investing.
 5. Active investing carries higher risk and potential to generate higher returns as compared to passive
investing.