How to Choose Between Active Mutual Funds And Passive Mutual Funds?

What do you expect from your fund manager as an investor in mutual funds? Excellent returns on your initial capital that is better than that offered over and above the market? If so, then as the manager of an active mutual fund, you will solely be responsible for the delivery of excellent results that that benchmarked by the market. If your manager fails to do so, then is it actually worth shedding those extra funds out of your pocket? A better and wiser option would be to make an investment in passive funds like index funds. They charge lesser, are less risky and deliver returns which are similar to those offered by benchmark indices. In order to arrive at a decision, let us compare both these sturdy options of funds:

First of all, let’s understand if equity funds outperform their benchmarks consistently and create greater value for their investors. In order to ascertain this, we need to observe the performance and growth of an open-ended equity fund that is diversified in its growth over varied periods of time. Over the past year, only half of the mutual funds in the market have been successful in outperforming their benchmark indices. When observed over a time frame of 3 years, less than 50% of the schemes have performed better than that expected of them over their period of investment. It is arguable that most of these mutual fund investments do not track a benchmark which is considered to be appropriate to their investment mandate. On the contrary, mid-cap funds have performed far poorly than mutual funds. While 61% of mid-cap funds in the market managed to outperform their benchmark indices over a period of 3 years, only 32% of them managed to beat their indices over a period of 5 years. If you are curious to know what factors lead to an actively managed fund underperform, then the answer is relatively simple. Fund managers, while buying and selling stocks on a regular basis, burden the fund with transaction costs in return. These funds are charged over the fund management charges, which in turn, reduces the value of the fund. Thus, active fund management is accompanied with risk in your portfolio. Since fund managers are burdened with the responsibility of beating their benchmark indices, they take risks so as to receive an edge over the index. However, if such bets fall flat, it may prove to be wrong for your investment.

It is very important for you to comprehend to the judgments provided by your advisor, unless you are fully satisfied with their reasons, do not give the green signal. Blindly following their proceedings only put your hard earned money into risks, wiping out all your investments. Eventually, prompting you to opt for debts like personal loan, home loan etc to fulfill your financial requirement. This can create dents on your financial stability in future and create hindrances to accept greater returns.

The only way by which you can assure yourself that your money is in safe hands is by understanding the aim of the financial advisor and to see if it is at par with yours. Even then, do a little homework on your own. Try to gain as much ”primary” knowledge as you can about the markets, about the type of funds in which your money is invested in, the behavior of the particular fund in different market situations etc. This will enable you to brace downfalls gracefully and increase your patience to wait till the markets bounce back to normalcy. The eventualities of downfalls will not give you sleepless nights, as you have better understanding of the markets and your financial advisor will guide you through such uncertain times.