Active Fund vs Passive Fund: Which Fund to Invest In?
One of the most widespread questions that investors have when investing in mutual funds is whether to invest in active funds or passive funds. Each fund has advantages and disadvantages, and the right choice varies according to your financial objectives, risk tolerance, and investment style.
At Integrated, we believe that understanding the distinction between the two styles can help investors make wiser choices and achieve greater wealth creation in the long term.
What are Active Mutual Funds?
Active mutual funds are managed by skilled fund managers who actively select stocks and bonds with an effort to outperform the benchmark index. An active fund is greatly determined by the competency of the fund manager and their research strategies.
Key Features of Active Funds are:
- Greater probability of generating returns that are above the benchmark.
- Become more adaptable to market trends.
- Generally higher expense ratio due to active management.
For example, many investors prefer ELSS mutual funds because they offer not only the potential for capital growth but also tax-saving benefits under Section 80C, along with a three-year lock-in period that encourages disciplined investing and reduces portfolio churn.
What are Passive Mutual Funds?
Passive funds simply mirror a market index such as the Nifty 50 or Sensex. The fund manager does not try to beat the market; instead, the objective is to replicate its performance.
Key Features of Passive Funds are:
- Reduced expense ratio, as there is minimal fund management involved.
- Reduced the possibility of a human mistake in stock picking.
- The returns are very close to the market index.
As digital platforms such as the iInvest app emerge, an increasing number of investors are turning to passive funds, as they are relatively cheaper and simpler to monitor.
Which Mutual Fund Is Better For You?
Performance:
Active funds are likely to beat the market but are also riskier. Passive funds, on the other hand, tend to offer returns that mirror overall market performance.
Costs:
Active funds are more costly because they are research-driven and actively managed. Passive funds are, in contrast, cheaper.
Transparency:
Active funds are comparatively less transparent, as they rely on the decisions of fund managers, and these decisions might not be visible to the investors. Passive funds are more transparent because they follow an index.
Suitability:
Active funds would be appropriate for investors who can comfortably accept a higher amount of risk in exchange for potentially greater returns. Passive funds can be a better option when one would like to have it simple and less expensive.
Making the Right Choice
Whether active or passive mutual funds are better is not one size fits all. The truth of the matter is that some experienced investors use both in their portfolio to achieve risk diversification and maximum returns.
Active funds can be suitable for you in case you desire expert-driven decisions and you are okay with higher costs. However, passive funds may be suitable when you want low-cost, transparent, and index-linked returns.
With the help of Integrated, you can explore the best mutual funds in India that match your financial objectives. Be it saving tax with the option of ELSS funds, increasing wealth with SIPs, or just investing in mutual funds without the hassle, the effective combination of active and passive funds can make you financially independent.
Final Thoughts
Both active and passive funds are an essential part of portfolios. It comes down to the ultimate choice of your financial plan, time horizon, and risk aversion. Through the iInvest app and the knowledge of our experts, you will be assured to invest and be closer to your long-term wealth creation plans.