Mutual funds bullish on passive funds; should you invest?
Investors who don’t have any investment knowledge or experience choose Mutual Funds to achieve better returns to reach their financial goals
At a time when the market was whirling under the reverberations of the Covid-19 pandemic, passively investments have been reeling in popularity. Owing to the increased levels of awareness, digital adoption, and product innovation over the years, investors have begun appreciating the potential of Exchange-Traded Funds (ETFs). Investors who don’t have any investment knowledge or experience choose Mutual Funds to achieve better returns to reach their financial goals. There are two kinds of Mutual Funds Active & Passive.
• Actively managed mutual fund schemes
These funds are managed by Fund Managers and require a lot of research and analysis to formulate the scheme strategy. Active investing is a proactive approach with frequent buy-sell decisions making most of the info flow and price fluctuations. The returns are compared with benchmark indices like NIFTY & Bank NIFTY etc. The strategy could be based on Market Capitalization, Economic Sectors, Company valuation, and other themes chosen by the AMC & Fund Manager. These funds have a deeper correlation with Portfolio Securities and could see more fluctuations as per changes in economic variables such as:
◦ Client Knowledge- Investors having fundamental understanding & higher risk tolerance can consider investing in more Active funds.
◦ Strategy Formulation- It is based on various parameters like Risk-Reward ratio, Economic prospects, Data Analysis and could involve complex algorithms.
◦ The Management- Fund Manager manages the scheme and keeps a track of different investment opportunities as per the strategy.
◦ Risk- Contains relatively higher risk.
◦ Returns- Contains relatively higher returns.
◦ Fee- Higher expense ratio.
◦ Portfolio- Portfolio rebalancing is quite frequent.
◦ Example- SBI Large & Midcap Fund.
• Passively Managed Mutual Fund Schemes
These funds are passively managed by Fund Managers and don’t require a lot of research and analysis to formulate the scheme strategy. Passive investing is predominately a product for investors who are eyeing straightforwardness, cost-effectiveness and do not want the complications of classifying the right funds. The returns are compared with other asset classes and benchmark indices like NIFTY & Bank NIFTY etc. These funds
(The author is managing director at Alankit; views expressed are personal)