Passive vs active mutual funds: Which can generate higher return, where you should invest
SPIVA) India Scorecard. It shows that a large chunk of actively managed Indian equity mutual funds underperformed their benchmarks. Many advocate for lowercost index funds and ETFs citing such studies. However, investors should understand that knee-jerk reactions concerning long-term investment plans are best avoided. Ultimately, the choice of active, passive, or both should be determined by individual preferences.
Most active funds lagging
Active equity funds rely on managers’ decisions, while passive funds attempt to track indices efficiently. As per SPIVA, five out of 10 large-cap funds underperformed the S&P BSE 100, while over 73% of mid- and smallcap schemes lagged the S&P BSE 400 MidSmallCap in 2023. ELSS funds did better, with 30% underperforming the S&P BSE 200. Longer-term data (see table) reveals various nuances about the frequency of underperformance.
Before using such insights to guide investment decisions, one should recognise the differences between active and passive investment avenues. Like fluctuating weather patterns, active and passive funds experience different performance cycles. For instance, during broad-based market movements, well-diversified large-cap active funds tend to perform well. In contrast, the Nifty50 index is heavily influenced by stocks like HDFC Bank and RIL, each accounting for over 10%. Thus, concentrated holdings prove beneficial during narrow rallies or downturns, helping index offerings outperform.
The numbers cited in such studies change frequently. The 2023 SPIVA study
