scorecardresearchMutual Fund Investing: Key reasons why you should opt for passive funds

Mutual Fund Investing: Key reasons why you should opt for passive funds

Updated: 17 Dec 2022, 10:23 AM IST
TL;DR.
Amid poor performance of active funds, passive funds have received an overwhelming response. In the past eight months, 70 passive mutual fund schemes have been launched
A passive fund is a mutual fund that has a portfolio of securities in the same proportion of a market index or a market segment

A passive fund is a mutual fund that has a portfolio of securities in the same proportion of a market index or a market segment

For a new investor, the decision of choosing active over passive, or vice versa, is fraught with a dilemma. There are pros and cons for each form of investment. But one thing is certain for the investors of passive mutual funds: they are cheaper, and there is some certainty that they would – most likely – deliver positive returns in the long run.

The returns given by these funds seem reasonably high when seen in the light of poor returns of active mutual fund which usually fail to beat the benchmark indices.

Between March 2020 to March 2021, only 3.45 percent large cap funds managed to beat the benchmark indices whereas 24 percent mid cap funds and 8.70 percent small cap funds beat the respective benchmark indices, according to a report by Morning Star India.

What are passive mutual funds?

A passive fund is a mutual fund that comprises of securities in line with a market index, or a market segment. Unlike an active fund, the fund manager does not take a call on what securities to buy and sell. 

Consequently, passive funds are cheaper to invest than active mutual funds, because the latter require fund manager(s) to invest time researching and analysing opportunities to invest in.

Why should you invest in them?

Experts believe that active funds may be a good bet during a bull market run but when the markets are playing uncertain – passive funds are, undoubtedly, a better investment.

Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, says, “During times of economic uncertainty, there are too many variables at play that make it difficult for an active fund manager to beat the market index and the bigger risk is of negative returns in a search for higher returns. Hence passive funds such as the index funds are a better bet during times of economic uncertainty, which is what we are seeing in the market today.”

 As on April 30, 2022       As on November 30, 2022
Passive fundsNo. of schemesNet AUM crore)   No. of schemes Net AUM (crore)
Index funds94         73,994137 1,23,711
Other ETFs     124 4,12,858146       5,01,541

(Source: AMFI)

There are some experts, on the other hand, who believe that passive funds are a better choice in a developed economy like that of US whereas in India, active funds still offer plenty of opportunities.

“The popularity of passive funds is an outcome of performance of active fund managers. But when you dig deeper, you will find that it is large-cap funds which underperform. This is again because both the stocks in the Nifty index as well as the stocks selected for large-cap funds are generally the same. So not much scope of outperformance is there,” says Abhishek Dev Co-Founder and CEO Epsilon Money Mart.

So, the investors who want to play safe and earn moderately good returns without having to run too high risk can take a hard look at passive mutual funds such as index fund schemes.

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First Published: 17 Dec 2022, 10:23 AM IST