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Actively Managed Mutual Funds Vs Passively Managed Index Funds

 

When it comes to investment, everyone is on the lookout for placing their money on a scheme that will give the highest returns. Mutual funds are great for high returns. However, many are unaware that mutual funds are actively managed as well as passively managed. While actively managed funds see the involvement of the fund manager in the decision-making on the movement of the assets; in the passive index funds, the manager cannot decide the underlying asset’s movement. The difference between actively managed mutual funds and index funds that are passively managed is a bit more detailed than people of. Let’s have a look at what the detailed differences are, shall we?

What is an Actively Managed Portfolio?

In simple words, your equity mutual funds, hybrid funds, debt mutual funds, and so on are actively managed mutual funds, where the fund manager plays an important role. For example, in the case of an equity fund, the fund manager decides the type of stock that will go in and out of the equity, based on the performance of the market, economy, as well as individual stocks. In an actively managed portfolio, the fund manager is also responsible for calculating if the existing stocks will remain the same if the invested funds need an increase or decrease, and so on. Irrespective of
whether you choose an equity fund or debt fund, the fund manager has a lot to do with the performance of the fund.

What is a Passively Managed Portfolio?

For a passively managed portfolio, the best example would be the index funds. These are mutual funds or Exchange-Traded Funds (ETFs) that are designed to follow rules which are preset for the fund to track a specified underlying asset. If you want to invest in index funds that are budget-friendly, passive funds are a great option.

Exchange-Trade Funds (ETFs), as a whole, are passively managed funds in which what goes in and out of the best index funds is not decided or calculated by the fund managers. However, this is monitored by the Securities and Exchange Board of India (SEBI). The returns of the index funds are deciphered into the returns that are made by the ETFs. In a passively managed portfolio, there might a few differences, which can be due to management fees, expense ratio charges, or any other additional dividends.

Actively Managed Portfolio vs Passively Managed Index Funds: Major Pros that You Should Know

Both the actively managed funds and the passive index funds are unique, offering different benefits and features that give you the flexibility of choosing according to your preferences. Let’s have a look at the primary advantage of both the funds.

Advantage of Actively Managed Funds

Actively managed funds are alpha-generating funds and for those who want to earn returns that are a bit more than the standard returns, this is your way to go. With the main objective of beating the returns of the other types of investments and generate an alpha return, the fund manager puts in all his/her effort, experience, knowledge, and time for better market research for your benefit.

Advantage of Passively Managed Funds

The primary advantage of passively managed index mutual funds is that they are cheaper. The expense ratio in passive funds is lower than those in active funds or any other investment type. According to the rules and regulations by the Securities and Exchange Board of India (SEBI), the expense ratio of index funds or ETFs cannot exceed 1%. Over the years, many times, the expense ratio in top index funds were seen to be just 0.05%.

Active vs Passive Mutual Funds: In a Nutshell

S. No. Particulars Actively Managed Portfolio Passively Managed Portfolio
1. Strategy Managed by fund manager who are responsible for deciding the fund compositions based on the market. Fund manager are responsible only to copy the movement of the indices; monitored closely by the Securities and Exchange Board of India (SEBI).
2. Returns To offer returns that are higher than the other investment types or te set banchmark. Passively Managed by index fund offer returns that are on per with the set banchmark.
3. Expense Ratio Depends on the orientation of the mutual funds. Usualy ranges from 0.08% to 2.25% (approximately). Here the expanse ratio is cheaper. According to SEBI rules, it cannot exceed 1%. Usually ranges from 0.05% to 1%.

Both the actively managed portfolio and passively managed index mutual funds in India are great investment strategies. The choice between them solely depends on the profile of the investor. If you want returns more than the benchmark, active funds are your deal. But if you want to invest in funds with a low expense ratio, then index funds or ETFs are a good option.

At Muthoot Finance, we give shape to your mutual fund investments through professional fund managers, fundamental analysis, and growth-oriented investment strategies. Visit the nearest Muthoot Finance branch to know more.

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