In active management, the fund manager seeks to pick stocks with the aim of beating the benchmark and generating alpha. A fund manager cannot possibly invest in the same stocks as the/she has to take a call on picking stocks outside the index or keeping the exposure of sectors different from the index. In Passive management a fund is passively managed if the fund manager replicates the index with exactly the same stocks and in the same proportion. Here the fund manager is trying to replicate the index performance with as little tracking error (we will have a post on tracking error soon. Suffice to say that it refers to the deviation of the performance of the fund from its benchmark) as possible. Since the fund manager has to mimic the index he will have very little cash and that too, only to meet redemption proceeds. Index funds and ETFs are examples of passively managed funds.