Why Active funds make sense?

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 Fundpassive 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

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