As a slew of mutual fund houses have new fund offers (NFOs) lined up, a vast majority of them fall in the category of passive funds barring some exceptions, of course.
According to the industry data, as many as 18 asset management companies (AMCs) launched a total of 28 mutual fund schemes in the month of July. A majority of these NFOs are either ETFs or index funds such as ICICI Prudential Nifty IT Index Fund, Aditya Birla Sun Life Nifty 200 Quality 30 ETF, HDFC Nifty 100 ETF. Other NFOs include IDFC Midcap Fund and Quantum Nifty 50 ETF Fund of Fund.
While the scale seems to be inclined towards passive investing, there are some mutual fund schemes and fund houses which prioritise active mutual funds.
So, here we explore what ticks for small investors more: active or passive mutual funds.
Key differences between active & passive
At the outset, however, let us elaborate the differences between active and passive investment. Active investment is a hands-on approach to investing. In this, you tend to trade in securities on a regular basis.
This form of investment provides more flexibility to the portfolio manager. One can earn profit from short-term volatility. The key aim of active investment is to beat the returns given by benchmark indices.
On the other hand, passive investment is a laid-back kind of strategy. This is a long-term investment wherein investors invest for a minimum of five to 10 years or even longer.
Rather than leveraging the short-term gains, investors tend to focus on future prospects of investments. In passive investing, investors do not react to each and every market move.
What to choose?
Experts advise that whether investors choose active or passive style of investing totally depends on their financial goals, expectations and risk appetite. Those who want to make quick gains can look for active investing whereas the ones who are patient can choose passive funds.
“Unlike in the Western markets, there is an evidence that half of the crowd can beat the index. The real scope lies in the middle and small cap funds where more than majority end up beating the benchmark index returns. On the other hand, if you want to invest and forget your investments for 10+ years then passive investing style is better. And even within passive, index funds are seen better over ETFs," said Amol Joshi, Founder of Plan Rupee Investment Services.
Another SEBI-registered investment advisor believes that investors should allocate their portfolio in the ratio of 7:3 between passive and active funds.
“We recommend investors to follow the time-tested Core-Satellite Approach. In this approach, the Core portfolio, which constitutes about 70% of the overall portfolio, is built using Index funds. The balance 30% of the portfolio, which is called the Satellite, can be used for Active funds. Preferably, the Core should consist of large cap exposure, where Index funds work best. In the mid-cap and small-cap exposure, which forms part of the Satellite, investors can explore Active strategies,” says Ravi Saraogi, co-founder of Samsthiti Advisors.
At the same time, some fund houses, which specialise in active fund management, assert their inclination for active investing strategy.
“Our belief is in the area of active fund management. We have a 35-member team of active fund managers and our strength is within active management space. It’s impossible to time the market and impossible to know if this is the good market or bad market. But what you know is that there are always opportunities in every market which exists as long as we are buying good businesses at attractive values,” said Prateek Pant, chief business officer of White Oak MF.
He further adds that the fund house will only be launching active funds in the foreseeable future. “Our stated strategy is to be an active manager because we have the capability. The team is founded by Prashant Khemka, one of the strongest proponents of active fund management. We are not here to sell products to increase AUM but to provide active management services to our investors so that we can outperform the benchmark,” he said.
Having said this, he added that there is an immense potential for each category of funds. “The overall share keeps on increasing of all categories – whether it is active category or passive. There is a room for all styles and all categories,” he added.