Will index funds give me better returns?

I am 37 years old and started investing in mutual funds in July 2021. I have systematic investment plans (SIPs) of Rs.2,500 in SBI Nifty Index Fund, UTI Nifty Next 50 Fund, Motilal Oswal Nifty Midcap 150 and Nippon Nifty 50 Value 20 Index Fund. Now, I want to increase my SIPs and invest for the next eight years. Should I invest in index funds or make any changes to my current investment plan?

—Sarthak Rastogi

I would like to acknowledge your decision to invest in mutual funds to build a corpus since 2021 and eight years from here on. The time horizon is quite good for equity-based investments and mutual funds are one of the most convenient ways of investing.

You started investing in July 2021 when the stock market corrected and sharply rose in a little over a year. There was a lot of buzz around index funds during that time as they were performing better compared to actively managed funds. This prompted many investors to invest in index funds. While it is good to start with index funds, as you gain confidence, creating a blend of index and actively managed funds can help to generate better returns in the long term.

If we look from performance perspective, your SIPs in Motilali Oswal Nifty Midcap 150, Nippon Nifty 50 Value 20 Index Fund, UTI Nifty Next 50 Fund and SBI Nifty Index Fund would have generated 25.4%, 14.6%, 10.5% and 10% per annum, respectively. Some of the actively managed funds that were doing well at that time and continue to do so are Parag Parikh Flexi Cap, HDFC Flexi Cap, SBI Large & Mid Cap and ICICI Prudential Bluechip Fund. Their returns are 19%, 20.6%, 15.6% and 15.4% per annum, respectively.

A blended approach may work better compared to only index funds. Active fund managers can identify and invest in companies that could grow better than companies that are in the Index. Index funds are based on market capitalization and no other criteria, whereas active funds are built and monitored by fund managers.

You can consider a mix of the following funds to invest in future. SBI Nifty Index Fund, Motilal Oswal Nifty Midcap 150, Parag Parikh Flexi Cap Fund, HDFC Flexi Cap and SBI Large & Mid Cap Fund.

Harshad Chetanwala is co-founder, MyWealthGrowth.