Before starting to invest in a mutual fund, investors often face a dilemma as to which scheme and category to opt for. Among a plethora of mutual fund schemes, investors prefer to go for the ones that are likely to deliver high returns.
At the same time, they also face a dilemma as to which category – active or passive – of mutual fund to invest into.
There are a number of differences between the active and passive mutual funds. One of the key distinctions is that active mutual funds aim to beat the benchmark index, whereas passive mutual fund’s returns are in tune with the benchmark index returns.
Active mutual funds give a scope to deliver alpha, i.e., an excess return over benchmark returns.
Most index mutual funds have either banking orIT stocks in the portfolio but the real activity happens outside these two sectors.
So, if you want to take part in the economy’s growth, you should invest in active mutual funds as well.
These are the key features of active mutual funds:
Higher expense: Active mutual funds have relatively higher expense ratio as compared to passive mutual funds. Unlike passive schemes, active mutual funds resort to more frequent buying and selling in line with the changing market conditions. This pushes the cost even higher.
Risk: Active mutual funds are riskier than their passive counterparts. So, only those investors who have a high-risk appetite should invest in these mutual funds.
Long term wealth creation: Active mutual funds can help in the long-term wealth creation and enable investors to meet their financial goals.
Contrarian bets: These mutual funds can earn by making contrarian bets and investing in the stocks that may not necessarily be part of the benchmark index.
Dynamic investing: By investing in active mutual funds, investors can inject a dose of dynamism in their portfolio. The portfolio of active funds is usually flexible and keeps changing based on the changing market conditions.
Meanwhile, wealth experts suggest that the right investing strategy is to complement active schemes with the passive ones.
“The idea is not to choose one over the other, but to keep both in the portfolio in order to make it more dynamic and valued,” says Deepak Aggarwal, a Delhi-based chartered accountant and investment advisor.