There is an ongoing debate in India about Index Mutual Funds Vs Actively Managed Mutual Funds. Is the debate worth it? Which type of Mutual Funds are better for Indian market? Is Indian market mature enough to switch to Index Funds across all segments of Mutual Funds? Who is the winner?
What are Index Funds?
Index funds, as the name suggests, are the funds or the schemes that invest in a particular index. These funds purchase all the stocks in the same proportion as the index it is bench-marked to. This means the scheme will perform in tandem with the index it is tracking. For example, if an index fund is bench-marked to Nifty 50, it will buy all the 50 stocks in the Nifty index in the same proportion as Nifty 50.
Some examples of popular Index Funds include NSE Nifty 500 TRI, S&P BSE 100 TRI, NSE Midcap 100 TRI, S&P BSE Small cap TRI. Big institutions such as the Employees Provident Fund Organisation (EPFO) also invest through index funds rather than actively managed funds. Such funds are process driven rather than person driven. And the reason is obvious. These funds invest in an index and the manager doesn’t have to choose the stocks to invest. These are, therefore, also known as Passive Funds.
What are Actively Managed Funds?
Actively Managed Funds or Active Funds, or simply referred as 'Mutual Funds' are just the reverse of Passive Funds. These are the most preferred route for Mutual Fund investments in India as on date. In an active fund, the fund managers choose the stock to invest based on the goal of that fund. Here, the manager tries to beat the market by choosing better stocks. Nevertheless, the problem with active funds is that the return on these funds depends on the goal and efficiency of the fund manager. Moreover, even if you are able to find a good fund with a coherent manager, still there is some danger of what might happen in the case the manager quits and moves to some other company. Tracking the manager along with the fund becomes a headache for many investors. Since these funds have more freedom and flexibility on investments, they are expected to outperform the index funds.
There are hundreds and thousands of Actively Managed Funds to chose from. Some of the examples are ICICI Pru Value Discovery Fund, Reliance Small Cap Fund etc.
What are Index Funds?
Index funds, as the name suggests, are the funds or the schemes that invest in a particular index. These funds purchase all the stocks in the same proportion as the index it is bench-marked to. This means the scheme will perform in tandem with the index it is tracking. For example, if an index fund is bench-marked to Nifty 50, it will buy all the 50 stocks in the Nifty index in the same proportion as Nifty 50.
Some examples of popular Index Funds include NSE Nifty 500 TRI, S&P BSE 100 TRI, NSE Midcap 100 TRI, S&P BSE Small cap TRI. Big institutions such as the Employees Provident Fund Organisation (EPFO) also invest through index funds rather than actively managed funds. Such funds are process driven rather than person driven. And the reason is obvious. These funds invest in an index and the manager doesn’t have to choose the stocks to invest. These are, therefore, also known as Passive Funds.
What are Actively Managed Funds?
Actively Managed Funds or Active Funds, or simply referred as 'Mutual Funds' are just the reverse of Passive Funds. These are the most preferred route for Mutual Fund investments in India as on date. In an active fund, the fund managers choose the stock to invest based on the goal of that fund. Here, the manager tries to beat the market by choosing better stocks. Nevertheless, the problem with active funds is that the return on these funds depends on the goal and efficiency of the fund manager. Moreover, even if you are able to find a good fund with a coherent manager, still there is some danger of what might happen in the case the manager quits and moves to some other company. Tracking the manager along with the fund becomes a headache for many investors. Since these funds have more freedom and flexibility on investments, they are expected to outperform the index funds.
There are hundreds and thousands of Actively Managed Funds to chose from. Some of the examples are ICICI Pru Value Discovery Fund, Reliance Small Cap Fund etc.
Why Index Funds are preferred?
1/ Low Total Expense Ration (TER)
These funds incur significantly lower expenses than actively-managed funds. For example, UTI Nifty Index Fund has an expense ratio of 0.20 per cent, whereas actively-managed funds may charge around 1 per cent on direct plans and around 2 per cent in regular plans.
2/ No dependency on Fund Manager
In the index funds, the stocks are not picked by the fund managers. These funds are merely copying the index. That’s why even if the fund manager of an index fund quits, it won’t create any havoc (unlike actively managed funds).
3/ Easy Selection of Funds
For the active funds, you need to read and understand the reason why the fund manager believes any stock can perform well in future. And this can be a very tedious job. On the other hand, the stock selection in the index fund is quite straightforward.
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