Active Funds Vs. Passive Funds: Which one is better for you?

Active Funds and Passive Funds

Active Funds are those funds that constantly try to outperform the market, to give better returns than the market. While Passive Funds are the funds that invest in index stocks in the same proportion as that of the index. This means that their returns are the same as that of the market and not more or less. Examples of such funds are Index Funds and ETFs.

The most debatable argument in the personal finance community is that which of the two – the active funds or passive fund is superior. Active fund supporters argue that their funds outperform the market and give higher returns. While passive investors feel that active funds underperform or do worse than the market index. Each time a stock is bought or sold, it attracts taxes and fees, resulting in lower returns.

Active FundsPassive Funds
Fund Manger chooses stocksInvestor chooes market/segment
Portfolio constructed based on research, analyst inputs etc.Investing in the market through Index Funds
Aims to 'Beat the Market'Aims to 'Replicate the Market'

Increasing inflows to Passive Funds

The perception of passive investing has been changing drastically. In India, passive funds are gaining acceptance and their AUM has surpassed Rs 1 lakh crore mark. Now, does this mean that actively funds are unable to give higher returns than the market?

Though passive fund’s popularity has been increasing, doesn’t mean you settle down at market returns. The best strategy would be to identify funds that offer higher returns than passive ones, yet not compromising on the benefits that a passive fund would offer. Invest in funds that have consistently outperformed its peers and the market. Also, its important that you select the right fund house that offers lower expense ratios.

With the stiff competition from passive funds, active funds have become more competitive. Active funds have become more responsible and have slashed their expenses to a great extent.

Reasons why active funds should be part of your core investment portfolio in 2019:

  • Considering historical returns, most of the top actively managed funds have managed to beat their peers and benchmark consistently across different market phases. Globally, 2019 is expected to be a volatile year. In India as well, with the ongoing elections, markets tend to be volatile. If India gets a weak mandate, stocks might not fare well. In such instances, actively managed funds might perform better than passive ones.
  • Higher costs set back as a disadvantage for active funds. However, this is being addressed by slashing the expense ratios. 
  • Developing countries like India have high growth potential, which creates an opportunity to do better businesses. This helps in economic growth. Investing in actively managed funds would, therefore, help you leverage the fund managers constant research to identify growth stocks. As a result, you’ll be at an advantage to earn higher returns.

Do you really think market returns are enough?

Unless there is a risk, the rewards aren’t pleasing. Similarly, though passive funds give market returns, the real question is that is sufficient to achieve your investment goals? Investing in passive funds are relaxing that you would earn market returns would make you a lazy investor.

When there are funds that have been consistently outperforming the market and its peers why not invest in them? Why lose the opportunity of higher returns to a passive fund? In developing economies like India, active funds still remain relevant. With multiple opportunities ahead of it, at least for a decade actively managed funds would outperform the passive funds.

When you are investing to achieve certain goals, you need to make sure that your investments would earn at least the amount required for it, if not more. With actively managed funds, the fund manager strives to consistently beat the benchmark returns. Therefore, tap this opportunity to earn higher returns rather than settling down for lower returns.

Invest in top active funds with Upwardly. Happy Investing!

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