Passively Managed Funds: which statement best describes them?

• A. They aim to provide returns in line with the market return.
• B. They aim to outperform the market.
• C. They guarantee no losses.
• D. They invest only in cash.

Answer: (A)

Passively managed funds are designed to mirror the performance of a market index. Their goal is to deliver returns that track the market, not to beat it, by holding the same securities in the same proportions as the index and making as few trades as possible. Since they aim to match the index, they typically have lower fees and the main deviation from the index comes from tracking error. They do not guarantee no losses—if the market declines, the fund’s value can fall just like the index. They also do not invest only in cash; while there are cash-like or money-market index funds, most passive funds hold the securities that make up the index rather than cash alone.