Active Funds: Active mutual funds schemes in India are more popular than Index or benchmark funds. These funds have outperformed the benchmarks by a decent margin over the 5, 10, 15 and 20 year period.
Index Funds: These are passive funds that mimic the benchmark like NIFTY or Sensex and tend to mirror portfolio with near zero deviation. Ideal for investors who start the journey in the stock market.
A comparison of the funds will help get some clarity between them.
| Active Fund | passive Fund |
|---|---|
| Fund Manager decides on allocation | Follows Index or benchmark |
| Can rotate sectors & stocks actively | Follows the framework |
| Deviation from benchmark by allocation is high | Deviation from benchmark by allocation is negligible |
| Performance aimed and achieved is higher | performance is in tandem to index |
| Fund management fee is slightly higher | Fund management fee is low |
| Generating alpha (excess return over index) is high | Generating alpha is ruled out |
| best suited when we believe fund manager can do better than index | best suited when we dotn want fund manager to take undue risk |
| best suited in growing and developing economy like India | best suited in developed economy like US where market becomes predictable |
| Ideal for seasoned investors who have prior experience in fund | Ideal for first time investors or statutory investors like pension funds or trust |
So if you are beginner start with index funds, if you have been an active investor you should go with active funds