Low-effort wins: This is how passive investing can outperform frequent trading
Index funds outperform the majority of active fund managers. How many times have we read this headline! By now, even the most rookie investor understands that active managers who run a high expense ratio face an uphill battle in beating their benchmark indices on a net return basis. India’s growth story has been much talked about and has captivated the investing community for several years.
It has been a story of resilience as well, given how the economy and the stock markets kept on going, while the world was dealing with an almost out of control inflation. All through this, the Nifty index has delivered a return of close to 27% for FY24. With the stock market growing rapidly, investments in funds that passively replicate index returns have also gone up significantly.
As per data available from AMFI, the ETF/Index funds in India have seen their AUM go up by approximately ₹250,000 crores or roughly 39% growth from the start of the current financial year. A large draw for investors towards passive funds is lower cost/expense ratios for most such funds. The expense ratios can be as low as 1/4th of comparable active funds, while still delivering the returns of an index.
In contrast, active funds typically aim to surpass benchmark indices such as Nifty 50 or BSE 500 trillion. However, looking at the returns of large-cap-focused mutual funds with active portfolio management, only a handful have managed to consistently outperform the Nifty 50 trillion benchmark over a 3 to 5 years horizon. Further, most such actively managed funds exhibit higher volatility in their returns compared to indices.
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