Some investors are comfortable making their own direct investments. Others opt for the managed fund approach so they can gain access to diversified portfolios, different types of assets and management expertise.

But not all managed funds are the same. Actively managed funds use research and market forecasts to actively select specific securities to try to outperform the market while index managed funds seek to track the performance of a market index.

An index measures the performance of a basket of securities. For example the S&P/ASX 300 Index measures the performance of about 300 companies listed on the Australian Stock Exchange. 

Index managers may use a replication strategy which involves buying every security in the given index in the same weighting as the target index. Another approach is called optimisation, where a representative sample of stocks is held in an index. It involves trading off the reduced costs of partial replication against the risk of not matching the index return.

The three most common active investment styles are 'growth', 'value' and 'style-neutral' (also known as core). These styles define the filtering processes and criteria fund managers apply when selecting which securities to invest in. For example, value managers will look for market inefficiencies and seek stocks they believe are undervalued.

Active managed funds are all about timing the market; index managed funds are about time in the market. Because index managers usually invest in all or most of the securities in the index, they provide diversification which means lower risk. Active managers will hold a much smaller portfolio of stocks than index managers and they tend to charge higher fees as they have higher costs in the form of research analysts as well as transaction costs from trading securities much more often.