Its Not About Active OR Passive, its About Active AND Passive

James Surowiecki, an American Journalist advocated that if we act together, we are better than what we think. He gives a perfect example of this in this book, “The Wisdom of Crowds”. In the contest held at a country fair in England in 1906, the entrants had to guess the weight of an ox. Almost 800 people entered the contest. Some were butchers and farmers, who had some experience with the weight of such animals. 

Many others were not. As it turned out, the average guess among all the entrants was 1,197 pounds, just one pound off from the actual weight of 1,198 pounds. The story perfectly fits in the stock market context,where a variety of opinions about a stock’s price will largely determine its true value at that moment. The only caveat is that everyone’s opinion should be independent and not influenced by others. 

This view led to the introduction and proliferation of passive investments,largely represented by ETFs and index mutual funds. These funds have witnessed a phenomenal rise in the last few years. Our special report on active versus passive funds talks about whythere is a place for both active and passive funds, despite an exorbitant rise in passive investments. 

In mutual funds, there are various tools available that can help you to exit and enter a fund very efficiently. These underutilised tools not only increase your returns, but are also more tax-efficient than many traditional products. Our cover story this time talks abouthow to use these smart strategies to enhance your total returns. 

Fixed depositsof banks in India remain the prime vehiclestoinvest your savings. This despite thevarious options available in mutual funds that can give better returns to the investors. Read our special report where we give you the perspective on different mutual fund products that can substitute fixed deposits for different time horizons and how these can be better utilised to park funds and get better returns. 

Smart Solutions 

"For SWP in which mode should the investment be made, SIP or Lump sum? For how many years one should remain invested to execute SWP option? How much money one should invest for how many years to get SWP of Rs 20,000 pm." 

- Jaswant Singh Malhotra 

Editor Responds: 

The cover story of our MF section this time will answer most of your questions. Our analysis shows that if a fund is expected to give a return of 15% annually, you need to invest little over Rs. 7.5 lakh to get Rs. 20,000 per month for the next five years.