Active Vs. Passive mutual fund schemes, which is better to invest?

Are you obsessed with making money through mutual funds? Well, that is a good choice of investment, indeed. An intelligent should diversify the investment portfolio to reap maximum profits. The next question in your mind would be whether you should invest in active equity mutual fund or a passive fund?

Active Vs. Passive mutual fund schemes, which is better to invest?
  • Bundle investments are better choice if you want to invest in the mutual funds. 
  • Actively managed mutual funds are not vogue funds. They involve more costs as a professional stock picker constantly switch funds to reap maximum profits. 
  • Passive funds are relatively cheaper and investing in large- cap passively managed funds will give good returns. 

Actively managed mutual funds VS Passively managed mutual funds 

Are you obsessed with making money through mutual funds? Well, that is a good choice of investment, indeed. An intelligent should diversify the investment portfolio to reap maximum profits. The next question in your mind would be whether you should invest in active equity mutual fund or a passive fund? 

Come on, let us find out which one is better?  

Active equity mutual fund:  

An active equity mutual fund usually has a higher price tag as an investment manager is constantly engaged in stock picking. These active equity mutual funds outperform their passive counterparts because the main aim of the fund manager is to invest vigorously to be ahead of the BSE or Sensex. The fact that draws investors towards active mutual funds is the fat profit they earn by boosting returns.  

A young investor with a high-risk appetite may choose to invest in active mutual funds. Even if the returns are too less, a young investor may redeem the loss from a nerve-wracking loss. The higher the risk, the higher will be the return. Ashish Shankar, Motilal Oswal Private Wealth Management MD and CEO says that.

NIFTY index is far ahead of the returns of large-cap funds in 2020. But some asset managers have fetched profit in some large- cap fund if we consider the average return in the past 3 to 5 years. There are 150 stocks in medium- cap and 250 stocks in small cap funds that are available for stock picking. This fact justifies an investor's choice to stay in actively managed mutual funds. 

Union Asset management company says that it is advisable to judge the returns of the mutual funds based on the average rolling returns. As per ARR, close to 52.85 % of the schemes, 57. 49% of the schemes and 62.24% surpassed the Total Return Index in one, three and five years, respectively. For example, ICICI prudential commodities fund has fetched 160% returns in the last year, Quant small-cap gave 155% returns last year, and Kotak small-cap fund gave 122% returns last year. If there is more space for equity, there is always a high chance to earn a higher alpha, even in large capital mutual funds. 

Passive mutual funds: 

Some investors feel that a professional stock picker adds cost to the investment and drags on the investment performance. Passive mutual funds are a better choice for those who are not interested in taking a higher risk. Those investors would be satisfied with passive mutual funds that mirror the performance of a particular index. They consider active funds are deeper holes getting out of that is likely to be very difficult. 

It is a fact actively managed small-cap mutual funds and mid-cap mutual funds performed incredibly well. But in the case of large-cap mutual funds like exchange-traded funds or index funds prove otherwise. Almost seven out of 10 large-cap passive funds have performed well in the last 3 to 5 years.   

Passively managed funds are less costly because the fund manager doesn't actively involve in stock picking to maximise the returns. The cost of asset management in such a case is only 0.05- 1.11%. On the flip side, the cost of asset management is 2.72%. Passively managed funds are perfect for institutional investors and those who want to tap opportunities in a wider market. If you want to play safe and stick to professional advice, then active funds are better. 

If you want returns at par with Sensex and Nifty, similarly invest in gold ETF passive mutual funds. The fund management cost can be surprisingly as low as 0.25%. 

Final say

A prudent investor would choose to diversify his investment portfolio to earn better profits. Time and again the Indian markets have proved that an investor can earn well if both the funds coexist in his profile. If you want to reap high profits by investing in small- cap and medium- cap funds, invest in actively managed funds. On the contrary, if you want moderate profits, invest in large- cap passive funds that chases the Sensex or Nifty to fetch some profit for the investors.