Explained: Index Fund vs Active Funds, Where to Invest: Should mutual fund investors invest in active funds or passive funds? This simple question can confuse many investors. Both types of funds have their own advantages and disadvantages. But there are so many options available in the market for investing in both categories of funds that anyone can get confused. However, to know the answer to this question, it is important to understand the advantages and disadvantages of active and passive mutual funds. Only after this can an investor choose the right option for himself.
What are Active Mutual Funds?
– The role of the fund manager is important in active funds.
– Based on their research and analysis, fund managers select the right stocks and manage the portfolio keeping in mind the segment, sector or theme of the fund.
– Active funds aim to outperform the market. Hence their fees and expense ratios are usually higher than passive funds.
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What are Passive Mutual Funds?
– For passive mutual funds, the fund manager’s involvement in the selection of stocks is very little.
– These funds follow a particular index, such as NIFTY 50 or SENSEX. Hence, they are also called index funds.
– Passive funds aim to track the performance of their benchmark index and the stocks are selected based on the composition of the index. Hence, fund managers do not actively select stocks for them.
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Advantages and Disadvantages of Active Funds
Benefits
– Active funds can outperform the market.
– They provide flexibility and fund managers can take advantage of market opportunities.
Loss
– Higher fees and expense ratios.
– Despite active management, some funds fail to perform better than the market.
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Advantages and Disadvantages of Passive Funds
Benefits
– Low cost and low expense ratio.
– Investors get average market returns, which can be better than many active funds.
Loss
– Unlikely to outperform the market.
– When the market falls, the performance of the fund also declines because it follows the index.
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Active vs Passive: What is the right investment strategy
No single option between active and passive mutual funds can be right for all investors. There are examples of success and failure in both active and passive funds. Therefore, while choosing the right fund for yourself, do not base it only on its category, but make the right decision by understanding the advantages and disadvantages of each fund. For this, it is important to know the special features, return history and risk estimates of the funds well. While deciding to invest, understand all types of options from flexi cap, multi cap, mid cap, small cap and large cap to index funds and choose the right fund keeping in mind your investment strategy and goal. A good balance of both active and passive funds can also be made in a good investment portfolio, so that the investor can get better returns with diversification.
