Is Now the Right Time to Invest in Passively Managed Funds?
Listen to Is Now the Right Time to Invest in Passively Managed Funds?
00:00
00:00
Passively managed funds such as Exchange Traded Funds (ETFs) and Index Funds have been gaining momentum in India. Over the last few years, a significant chunk of actively managed funds, especially large cap-oriented funds, have not only failed to generate sustainable alpha, but have also underperformed the respective benchmark index.
Amid this prolonged economic slowdown, the equity market has not witnessed any sustainable broad-basedrally in the last few years. Consequentially, only a handful of stocks across market capitalisation have witnessed a surge in prices. Since mutual funds avoid having a concentrated portfolio consisting of a small set of stocks, it affected the performance of funds across categories.
Subsequently, the poor performance of actively managed funds coupled with heightened volatility in the equity market has made it difficult for retail investors to pick the right schemes for the portfolio. This, in turn, has elicited rising interest for passively managed funds.
Graph: AUM of passive funds on the rise
(Source: AMFI)
As of September 30, 2020, there are around 100 passive funds managing assets worth over Rs 1.6 lakh crore. The asset under management of ETFs tracking the Nifty 50 index is close to the Rs 1 lakh crore milestone and now constitutes more than half the corpus of the ETF industry.
It must be noted that a major part of the corpus of ETFs has been contributed by the EPFO, while the contribution of retail investors is gradually rising.
Earlier, most passive funds tracked only the large cap index, the Nifty 50 and Sensex, plus few sectors such as banking. However in the recent months, mutual funds have launched passive funds that track various categories (equity, debt, gold), themes (ESG, global), sectors (pharma, IT), as well as other innovative products to help investors create a diversified portfolio.
If you are an investor looking to earn decent returns from equities by tracking the respective benchmark index and do not have the appetite for high volatility, or if you are new to mutual fund investment, passive funds can be ideal for your needs.
Table: Passive funds aim to mirror the performance of the benchmark index
| Category |
Absolute (%) |
CAGR (%) |
| 1 Year |
2 Years |
3 Years |
5 Years |
7 Years |
| Category average - Index funds : Nifty 50 |
1.44 |
8.11 |
4.22 |
7.61 |
9.96 |
| Category average - Index funds : Sensex |
3.35 |
10.19 |
7.05 |
8.31 |
10.17 |
| Category average - Index funds : Others |
1.26 |
5.68 |
1.16 |
5.76 |
10.07 |
| NIFTY 50 |
1.59 |
8.31 |
4.39 |
7.33 |
9.71 |
| S&P BSE SENSEX |
2.78 |
9.70 |
6.59 |
7.96 |
9.93 |
| S&P BSE 500 |
2.42 |
7.14 |
2.07 |
7.09 |
10.77 |
Data as on October 26, 2020
(Source: ACE MF, PersonalFN Research)
To build a portfolio of passive funds assess your financial goals, investment time horizon and risk appetite, and invest accordingly to create a diversified portfolio of large, mid and small cap stocks. While selecting passive funds, pick the one with low expense ratio and low tracking error to earn reasonably higher returns than the index over the long term.
[Read: How to Invest in Mutual Funds amid Volatile Markets]
However, keep in mind that market crash impacts index funds as well. Unlike index funds, actively managed funds are better poised to take advantage of dynamic market conditions and make tactical allocation in attractive looking stocks/sectors/market cap depending on the outlook.
During the market crash, the actively managed funds get the opportunity to pick strong companies available at attractive valuations. Hence, they can outperform the market with remarkable margin during recovery and bull phase. Thus, if you pick the right scheme, it can reward you with high alpha over the long term.
India being an emerging economy, categories like midcap and smallcap-oriented funds can still give the fund managers the opportunity to generate high alpha for its investors. On the other hand, for categories like large cap-oriented funds, a passive investment strategy can make more sense.
The decision on whether to invest in an actively managed fund or index fund, or a combination of both should depend on financial objective, investment horizon, and risk taking ability.
If your strategy is to get alpha-generating returns, index funds may not be the right option for you.
Some actively managed funds have the ability to generate high alpha for its investors across different market phases and cycles.
If you too wish to invest in such high alpha generating funds, PersonalFN's latest The Alpha Funds Report 2020 will provide you instant access to 5 high potential alpha funds which we consider to be the biggest money-making opportunity for 2020 and years to come. Get access to this report here...
Warm Regards,
Divya Grover
Research Analyst
Join Now: PersonalFN is now on Telegram. Join FREE Today to get ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds