PremiumActive funds are those where the fund manager takes a call on what securities to buy and sell; a passive fund, as its name suggests, is one where there is no call that a fund manager takes, but buys securities that mimic an index
There are two types of funds available for investors: active and passive. Active funds are those where the fund manager takes a call on what securities to buy and sell. A passive fund, as its name suggests, is one where there is no call that a fund manager takes, but buys securities that mimic an index. Exchange-traded funds (ETFs) and index funds are forms of passive funds. Here’s a look at what to pick, based on the following factors:
Tracking effort
Passive funds are linked to indices and don’t change allocation unless securities in the index change. Thus, an investor needn’t frequently track the performance. Active funds see changes at a higher frequency due to the fund manager. One needs to track at least once a year for long-term funds and sooner for short term.
Passive: good
Active: not good
Cost
Passive funds are cheaper as there is no costs of research, stock analysis or fund managers. This leads to lower expense ratios. For equity-linked ETFs, average expense ratio has fallen to 0.4% per annum. Active funds have higher costs due to fund manager salaries, operations and research, and their average expense ratio is 2.25%.
Passive: good
Active: not good
Speed
ETFs can be bought and sold directly through the day. Transactions can be completed immediately. This is not the case with index funds, where you will have to buy and sell through the asset management company and you get one price in a day. While for liquid funds redemption takes a day, for equity funds it takes up to 3 days.
Passive: good
Active: not good
Returns
In India, passive funds are largely available in the equity space. Returns of passive funds are linked to large-cap indices. They have not done as well as active funds. Average returns in active funds have been more than 3% year-on-year for 10 years. Best performing active funds have seen much higher returns.
Passive: not good
Active: good
