Active vs passive investing and index tracker funds

When you invest through a fund, the single biggest choice that shapes what you get is whether the fund is actively managed or passively managed. An active fund employs a manager who picks shares, bonds and other assets with the aim of beating the market. A passive fund, also known as a tracker or index fund, simply follows a market index such as the FTSE 100, aiming to match its performance rather than beat it¹.

The two styles differ most sharply in cost. Tracker funds can cost as little as 0.1% a year, which is £1 for every £1,000 you invest, while most actively managed funds charge annual management charges of 0.75% to 1.25%². They also differ in what you are paying for: with an active fund you are paying for a manager's judgement, and only 21% of active equity funds managed to outperform the average passive fund in their sector over the ten years to July 2026².

Neither style is inherently better. This page explains how each works, what each costs, how the fund structures differ, how to start, and what can go wrong.

Active or passive: how each style is managed

A fund is a collection of many different people's money, managed by a professional fund manager who invests it across a range of assets such as shares or property, depending on the fund⁶. What separates an active fund from a passive one is who decides what the fund holds, and what it is trying to achieve.

In an actively managed fund, the investment manager or managers select what they consider to be the best or most appropriate shares or bonds, in line with the fund's stated objective and investment policy⁷. A professional fund manager decides what to buy on your behalf based on the fund's aims, monitors the holdings and makes changes over time⁸. The aim is outperformance: active funds are run by portfolio managers who select assets with the aim of beating the market¹.

A passively managed fund takes the opposite approach. Passive funds, also known as tracker funds, aim to match the performance of a stock market index by investing in companies that represent the relevant index⁹. No one is making picks: the fund's holdings are dictated by the index it follows. The trade-off is straightforward and is stated plainly by one of the largest tracker providers: index funds will track the market, they won't beat it¹⁰.

Some products blur the line. Vanguard's LifeStrategy funds are described as actively managed, but they achieve their objective by investing at least 90% of their assets in a diversified portfolio of passive funds run within the same group¹¹. And it is possible to invest in "active ETFs", which are tracker funds that track a custom-made index of suitable firms, sometimes built around ethical criteria¹². So the label on the tin does not always tell the whole story: what matters is whether a person is choosing the holdings, and what the fund is trying to do.

Index tracker funds follow the market, not a manager's picks

An index tracker fund is a passive fund designed to follow the performance of a market index such as the FTSE 100 or the Dow Jones¹. Index funds track the performance of a specific market index, and they are known as passive funds¹³. Rather than trying to work out which companies will do well, the fund simply holds the companies that make up the index, in the same proportions, so its value rises and falls with the index itself.

This has practical consequences for what you can expect. A tracker will not beat the index it follows, and it will not protect you when the index falls: if the market drops 20%, a tracker on that market drops with it. What you get instead is the market's return, at low cost, without depending on any individual manager's skill. Tracker funds are generally much cheaper than active funds, sometimes costing as little as 0.1% a year².

Tracker funds also differ from traditional funds in how they are priced. Fund prices do not fluctuate throughout the day; they are set at the end of the day¹⁴. There is no minimum period you must hold a tracker fund, but you can only buy or sell it at its daily valuation point⁴. Exchange-traded funds, covered below, work differently.

The evidence on whether active managers justify their fees is mixed but sobering for the active case. Only 21% of active equity funds were able to outperform the average passive fund in their sector over the ten years to July 2026². That is a past-performance figure, not a prediction, but it is the reason many investors start with trackers. The dedicated pages on investment funds and ETFs vs index funds go deeper on each structure.

Unit trusts, OEICs, investment trusts and ETFs

Active and passive are styles of management, not types of product. Both styles come in several legal and trading structures, and the structure affects how the fund is priced, traded and charged.

There are many types of fund, such as investment trusts, unit trusts and exchange-traded funds (ETFs)⁵. Unit trusts and OEICs (open-ended investment companies) are the traditional pooled funds most people meet first: they are priced once a day, and you buy and sell units directly with the fund manager. Typically 40 to 60 underlying assets are held in a single fund¹⁵. The page on OEICs, unit trusts and other fund structures explains how these work.

Investment trusts are companies listed on the stock exchange, and most of them are actively managed, which means they tend to have higher charges than tracker and index funds¹⁶. Investment trusts that invest in more specialist assets, such as property, private equity or infrastructure, are likely to have higher charges still than those investing in conventional assets like shares or bonds¹⁷. See investment trusts explained for how their structure differs.

Exchange-traded funds differ from traditional funds because they are listed on a stock exchange, so you can buy and sell them at any time the exchange is open². This is the main practical difference from a unit trust or OEIC, which deals once a day. ETFs come in both passive forms, tracking an index, and active forms, as with the active ETFs noted above¹².

All of these can be held inside a stocks and shares ISA. Several different types of fund can be held in an ISA, including equity funds, tracker funds, unit trusts and OEICs¹⁸. Where you hold an investment matters for tax, and the page on where to hold investments compares ISAs, pensions and general accounts.

Fund charges: ongoing charges of around 1% and initial fees up to 5.5%

Funds often levy an initial fee when you invest, up to 5.5%, and an ongoing charge, typically around 1%⁴. Some funds have an initial charge of up to 5.25%⁴. In practice many funds bought through platforms have no initial fee, but the ongoing charges are the ones that really matter, because they are deducted year after year.

The gap between active and passive charges is wide and consistent across sources:

Fund management charges tend to sit between 0.1% and 0.3% for passive funds, although actively managed investments can cost more¹⁹. Passive funds are cheaper, with some index funds and ETFs costing less than 0.1%¹⁵. Active funds tend to charge more, such as 0.5% or more², and the fees are slightly higher because someone watches the holdings and makes changes to try to improve things when necessary²⁰.

A performance fee is defined in legislation as a fee calculated by reference to the returns from the investments held by the scheme, whether capital appreciation or income, rather than by reference to the value of your rights under the scheme²¹. Under FCA rules, an investment is treated as subject to a performance fee where the investment itself has one, or where it invests in products to which a performance fee applies²². So a fund of funds can carry performance fees from its underlying holdings even if it charges none itself.

Charges compound against you. An illustrative example compares £1,000 invested in a fund costing 0.1% with the same amount in a fund costing 1%, both growing at 5% a year: after five years the cheaper fund would be worth £1,275 and the more expensive fund £1,214, a gap of £61²³.

On £1,000 invested in a fund growing at 5% a year, after five years the cheaper 0.1% fund would be worth £1,275 and the more expensive 1% fund £1,214, a gap of £61². The gap widens with the amount invested and the years held. Beyond the fund's own charges, investment platforms charge either a percentage annual fee or a fixed amount each year³, and there can be trading fees and stamp duty, exit fees and platform fees on top of the ongoing charge². The pages on fund charges and the ongoing charges figure and platform fees break these down.

How to start: from around £50 a month or a £100 lump sum

You do not need a large sum to begin. You can normally invest in funds from £100 as a lump sum or £25 per month⁴. For investment companies, instead of investing a lump sum you can choose to invest regularly, as little as £50 per month²⁴, and you can invest in investment trusts from as little as £50 a month²⁵. Some ready-made services start at just £50 a month or a £500 lump sum²⁶. Minimums vary by provider and fund, so check before you commit; the page on minimum amounts to invest collects typical figures.

Most people buy funds through an investment platform. Many platforms offer investment funds, shares, investment trusts, ETFs, bonds and other investments, while some only offer investment funds²⁷. How platforms work, and how their fees are charged, is covered in how investment platforms work.

A simple process for starting looks like this:

1. Decide how much you can invest regularly, or whether you are investing a lump sum, and check the fund's minimum.
2. Choose where to hold the investment, for example a stocks and shares ISA, a pension or a general investment account.
3. Choose an active fund, a passive tracker, or a ready-made portfolio that mixes both.
4. Open the account, read the fund's KIID or KID before buying, and set up the payment.
5. Review periodically, and be prepared to hold for years rather than months.

Before investing at all, the basics matter: in general, investing is for money that can be parted with for at least five years, as this gives a better chance of riding out the ups and downs²⁸. Over longer periods of five years or more, investments such as stocks, shares and funds have the potential to give more than cash, but the value can fall as well as rise and you may get back less than you put in²⁹. Money needed soon is generally held in savings; investing vs saving compares the two.

Reading a fund's KIID before you buy

Every investment fund has a stated objective and investment policy, which can be found in the fund's prospectus and Key Investor Information Document (KIID)⁷. The KIID and prospectus detail how the fund would invest your money and how risky it is, using a risk scale from 1 (not very risky at all) to 7 (very risky)². Reading this before you buy tells you what the fund is allowed to invest in, what it is trying to achieve, what it costs and how risky it is rated.

The rules on these documents are in transition. UCITS products, the mainstream regulated funds sold to UK consumers, were required to come with a KIID³⁰. Under the newer packaged retail investment rules, products come with a Key Information Document (KID), but open-ended funds have been told they do not have to produce KIDs yet; in the meantime they continue to produce the KIID³¹. The KIID included information about the product's past performance, rather than future performance scenarios³², which is one reason the two documents look different. The page on fund documents explains what each document contains and where to find it.

A factsheet is different again: it is a provider's own summary, usually updated monthly, and is not the regulated disclosure. For performance figures, be careful what you compare: investment company performance figures can be quoted in ways that mean different things, and the guide to investment company performance figures explains why a figure you see may change.

The value can fall: risks of investing in funds

The value of your investments can fall as well as rise, and you may get back less than you put in³³. That applies to passive funds as fully as to active ones: a tracker follows its index down as well as up, and an active manager can be wrong. There is no fund style that removes market risk.

The main risks and how they differ by style:

• Market risk: both styles fall when markets fall. A tracker falls in line with its index; an active fund may fall more or less depending on its picks.
• Manager risk: specific to active funds. The manager's choices can underperform the market, and over the ten years to July 2026 only 21% of active equity funds beat the average passive fund in their sector².
• Charges risk: higher charges drag on returns year after year, as the £1,275 versus £1,214 example shows².
• Specialist asset risk: investment trusts in property, private equity or infrastructure are likely to have higher charges and can be harder to sell in stressed markets¹⁷.
• Inflation risk on the cautious side: a portfolio with a greater proportion of bonds and cash will be lower risk, but leaves your money vulnerable to being eroded by inflation³⁴.

Guidance on timeframe is consistent across the industry: investing in funds is generally for money that can stay invested for five to ten years, or longer, riding out the inevitable ups and downs⁵. The longer horizons of five, ten or even 20 years are associated with investing, especially where the investment is very high risk³⁵. Diversification, spreading money across different assets and markets, is the main tool for managing risk; diversification and asset allocation explains how it works.

If something goes wrong beyond normal market falls, there are routes to help. If you were badly advised, mis-sold investments and bad investment advice sets out how to complain, and the Financial Ombudsman Service can look at complaints about regulated firms. The FSCS covers certain firm failures, though it does not cover poor performance. If you are considering paying for advice, advisers charge an initial fee usually ranging between 1% and 4% and an ongoing annual charge between 0.5% and 1.5%³⁶, and the FCA reports averages of 2.4% of the amount invested for initial advice and 1.9% a year for ongoing advice³⁷.

Who provides active and passive funds in the UK

Active and passive funds in the UK are provided by fund managers, from large global groups to specialist boutiques, and are bought either directly from the provider or through an investment platform. Vanguard is one of the best known names in passive investing, and its index funds and LifeStrategy range are widely held¹¹. Artemis is an example of an active house, with managers selecting what they consider the best or most appropriate shares or bonds for each fund⁷. Scottish Widows offers both actively and passively managed funds and ready-made options⁹.

Several providers sit in between. Quilter's WealthSelect lets investors choose an active, blend, or passive investment management style for a portfolio³⁸. JPMorgan's Income Investing strategy is described as one of its most actively managed, invested in active and passive ETFs³⁹. Halifax offers share dealing and fund investing where fund prices are set at the end of the day¹⁴, and Hargreaves Lansdown, one of the largest platforms, publishes fund FAQs covering minimums, charges and dealing⁴. Interactive Investor's fund pages note that passive funds can cost less than 0.1% while active funds tend to have an ongoing charges figure of between 0.85% and 1%¹⁵.

Pension schemes, including workplace pensions, also invest through funds of both kinds: they invest in bonds issued by corporations and governments, equities, property, infrastructure and other alternative assets⁴⁰. So even someone who has never chosen a fund directly is very likely to be invested in active and passive funds through a pension. The pages on fund managers, ready-made portfolios and pension and investment providers give more detail on who offers what.