Should you opt for passive funds over active funds?

A lot of asset management companies (AMCs) have recently launched exchange-traded funds (ETFs) and index funds. Also, there are a few, which have filed the draft offer and are pending for approval from Securities and Exchange Board of India (SEBI). Not just equity but Edelweiss also launched the first debt ETF in India. This clearly shows the emergence of passive investing in India. Besides, there are various studies carried out all over the world that explains how passive investing is better than active investing. However, people are still confused as to what is better for them. Therefore, in this article, we are going to discuss whether you should ditch your actively managed fund to invest in a passive fund.

When it comes to the advantages of investing in passively managed funds then, the biggest advantage is the cost factor. Passive funds have way less expense ratio than active funds.

As we can clearly see in the above table, cost passive investing has an edge over actively managed funds. Thus, cost should not be the only factor that one should consider while investing. Let us now look at the returns provided by the actively managed large-cap funds against S&P BSE Sensex and S&P BSE 100.

The above table clearly shows that, in all the rolling periods, the actively managed large-cap funds were able to outperform the index. Hence, with this, we can clearly say that as far as India is concerned, it is still better to invest in actively managed funds rather than a passive investment. Therefore, don’t ditch your actively managed funds, rather review it at least quarterly to check its relevance.