Policies, Codes & Other Documents
Investing has become more intense than ever, there are many new options with a complex risk-return framework which make it even more difficult to make the right choice based on your needs. Among the many investment options, we also have the option of investing in passively managed funds and actively managed funds. Although the name is indicative of the nuances of the investment option, we look at the workings of these funds and the pros and cons of investing in them.
Passive funds as indicative are passively managed mutual funds, the scheme mimics the indices and the returns are in line with that of the index. There is no effort to generate alpha as the objective is to get returns in line with that of the market. Passive investing is a style that aligns well if you are looking at staying invested over the long term. Among the many benefits of passive funds, here are a few:
One of the most popular categories of passive funds is the Index fund, the Index mutual funds mimic the respective index and offer returns similar to that of the index. The risk profile is also aligned with that of the specific index. You may invest via lumpsum or SIP (systematic investment plan). When compared to active funds, the risk profile of passive funds is much lower. Using the SIP route for investing will lower the risk even further.
TATA Nifty 50 Index fund is one such fund that aims to mimic the holding of Nifty 50 and provide returns in line with the indices. These types of funds are ideal for long-term financial goals such as retirement planning or children's education.
An active fund is actively managed by the fund manager, the fund manager has the objective of surpassing the returns generated by the benchmark indices. The fund manager is also required to conduct the workings of the fund in such a manner that its performance is better than that of its peers. The fund manager is always actively scouting for investment opportunities that will help in the outperformance of the fund being managed. Alpha is generated by exposing the portfolio to various factors which contribute to the generation of returns. Often fund managers may use the momentum style of investing to invest in counters which are on an uptrend, the focus is on investing in winners as against the losers. The Fund manager along with his team considers multiple factors such as company fundamentals, economic trends, and macro-economic factors when making investment decisions that would benefit the investor and aim to generate higher returns. Following are the benefits of investing in active funds.
You may invest via lumpsum or SIP (systematic investment plan). When compared to passive funds, the risk profile of active funds is much higher. Using the SIP route for investing will lower the risk even further.
|Point of difference||Active funds||Passive funds|
|Type of management||Active||Passive|
|Fund manager role||Maximum||Minimal|
|Focus/objective||Alpha generation||Mimics index|
|Transaction costs||Relatively high||Relatively low|
|Return potential||Relatively high||Relatively low|
As discussed above, both active funds and passive funds have their pros and cons. Therefore, the choice of type of mutual fund should be always guided by your investment goals and risk appetite. Typically, a conservative investor could choose a passive fund as they provide the opportunity to participate in the market without frequent tactical realignment.
One should ideally look at a portfolio that combines allocation between actively managed funds and passively managed funds to generate maximum returns and have a cost-effective investment strategy. You can always reach out to experts at TATA Capital Wealth who can guide you in choosing the fund most suited for your needs.
Policies, Codes & Other Documents