In this article, we try to understand the strategies and how they can be beneficial for you.
Active Mutual Funds: These funds involve fund managers actively selecting stocks or bonds with the aim to outperform benchmark indices. Their success hinges on the manager’s expertise, market insights, and timely decisions.
Passive Mutual Funds: These funds replicate specific market indices, such as the Nifty 50 or Sensex, aiming to mirror their performance. They involve minimal trading and are generally more cost-effective due to lower management fees.
Now let’s talk about the pros and cons of both the strategies.
Active Funds
Advantages: These funds aim to outperform the market by relying on the expertise of fund managers, offering flexibility to adapt to changing market conditions. This can be especially helpful in volatile or under-researched areas where skilled managers can spot opportunities.
Drawbacks:
Active funds generally come with higher fees due to management costs, and not all managers succeed in consistently beating the market, making them a costlier and sometimes riskier bet.
Also Read: When mutual fund investors should rebalance their portfolios
Passive Funds
Advantages: Passive funds typically offer low fees and steady performance that mirrors market indices like the Nifty or Sensex. They’re a good fit for long-term investors who want broad market exposure without high costs.
Drawbacks: Since these funds simply track the index, they don’t have the flexibility to shield investors from market downturns or capitalise on short-term opportunities. Their performance is tied directly to the market — both the highs and the lows.
In 2024, a significant portion of active equity large-cap funds underperformed their benchmarks, highlighting the challenges of active management in certain market conditions. Conversely, passive funds have gained traction for their cost-effectiveness and consistent performance.
Investors should align their fund selection with their financial objectives, risk tolerance, and investment horizon. A blended approach, incorporating both active and passive funds, can offer diversification and balance. For instance, passive funds can provide stable core holdings, while active funds can be utilised to target specific sectors or capitalise on market opportunities.
As the investment landscape evolves, staying informed and periodically reviewing one’s portfolio is essential to ensure alignment with financial goals and market conditions.
Also Read: Taxman can’t reopen cases after 3 years, whether under old tax regime or new
