It is where human capital is used to manage the portfolio of funds. Normally, managers in charge of active management rely fully on personal judgment, forecasts, and analytical research to decide the type of securities to purchase, hold or sell. Those investors that don’t use the efficient market hypothesis always believe in active management.
Investors believe that there are inefficiencies in markets that make the market prices not be correct. Thus, it is easier to make a profit in the stock market by identifying those securities that are mispriced and coming up with a strategy to take advantage of them.
Active management aims to generate good returns than that of a benchmark(market index). Investors use the stock index to measure the stock market and compare the current prices with previous prices, which helps to calculate the market performance. Unfortunately, many active managers are not able to outperform passively managed funds. Moreover, the actively managed funds usually charge high fees than the passively managed funds.