For a new investor, the decision to choose active over passive, or vice versa, is fraught with difficulty. Each type of investment has advantages and disadvantages. But one thing is certain for investors of passive mutual funds: they are cheap, and there is some certainty that they will – probably – deliver positive returns over the long term.
The returns provided by these funds tend to be higher compared to the poor returns of active mutual funds, which often fail to beat benchmark indices.
Between March 2020 and March 2021, only 3.45 percent of large-cap funds beat their benchmark indices, while 24 percent of mid-cap funds and 8.70 percent of small-cap funds beat their respective benchmark indices. Report as if morning star India.
What are passive mutual funds?
A passive fund is a mutual fund that includes securities aligned to a market index or market segment. Unlike an active fund, the fund manager does not call what securities are bought and sold.
Therefore, passive funds are cheaper to invest in than active mutual funds, as the latter requires the fund manager(s) to invest time and analyze investment opportunities.
Why should you invest in them?
Experts believe that active funds can be a good bet during a bull market run, but when the markets play out in uncertain times – passive funds are undoubtedly a better investment.
Vivek Iyer, partner and head (financial services risk) at Grant Thornton Bharat says, “In times of economic uncertainty, there are so many variables at play that an active fund manager can beat the market index and the biggest risk is negative returns in search of higher returns. So funds like index funds do better in times of economic uncertainty, which is what we’re seeing in the market today.
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There are some experts, on the other hand, who believe it is a better choice in developed economies like the US, but in India, active funds still offer many opportunities.
“The popularity of passive funds is a result of the performance of active fund managers. But when you dig deeper, the underperformers make big bucks. This is again because the stocks in the Nifty index and also the stocks selected for large-cap funds are generally the same. So there is not much scope for performance,” he said. Abhishek Dev, Co-Founder and CEO, Epsilon Money Mart.
Therefore, investors who want to play it safe and earn moderate returns without having to take too high of a risk can take a closer look at passive mutual funds such as index fund schemes.
Here we explain the difference between stocks, mutual funds and ETFs.
First published: December 17, 2022, 10:23 am IST