During covid lockdown, the stock and mutual fund markets saw a considerable jump in new investors. Most of them were young, and some had the extra nerve to dive into the stocks and mutual funds without much knowledge. Some sensible newbies had patience and tried to make out what these things were. And if you had an eagle eye, you could see that mutual fund needs a glossary of their own!
There are many parameters to choose between the correct fund for yourself. One major factor is the expense ratio*, which varies in all funds. Some have high; some have low.
Diving deeper into saving that extra penny, we see the factor of investing in either of the two fund types- Active Mutual Funds & Passive Mutual Funds.
- Active Mutual Funds- These funds are managed by skilled fund managers with in-depth knowledge of the market. And since they work it actively, it’s called Active Mutual Fund, hence higher expense ratio.
- Passive Mutual Funds- These funds generally gather less of the fund manager’s attention as these follow one of the many Indices, like Nifty 50, Nifty SmallCap, etc. Since less attention and work are required to manage these funds, their expense ratios are extremely low.
Now there are various kinds of active mutual funds, more kinds than there are fingers in your hand! Fund managers with deep knowledge and expertise aim to give the investors maximum returns within the category. How do they tell the investor that they have generated good returns? It’s simple; they try to beat the respective Index in which the mutual fund is. For example, the fund manager of Axis Small cap Mutual Fund says that we have outperformed the Nifty Smallcap Index, and its investors would be happy! But sometimes, when there is volatility or downfall in the market, these active funds tend to underperform compared to their Index fund counterparts. As the last SIP or Lumpsum invested before the fall is on very NAV, and after the fall, it drops significantly. So it’s a mixed bag of returns, with moderate to a high fee in the form of exchange ratios, made very attractive to investors by advertising!
On the other hand, investment gurus like Warren Buffet, for a very long time, suggested that nothing can beat the returns of an “Index Fund” in the long run. Since the Index, like the Nifty 50, is the indicator of 50 top Indian companies, if a company is performing poorly, it’ll be removed and replaced by a better one. It means that Index Funds are regulated, not by the Fund Managers, but by NSE Indices Ltd. Buffet’s logic says, since the Index like Nifty 50 or Sensex 30 represents the country’s best companies, regulators have an eye on the performance. There is no need for managing this fund, thus saving the excess headache of managing and the fee of investing. Therefore, it is safe to conclude that both types pf funds have enough potential. An investor could consider SIP in Index Mutual Funds initially and further consider Active mutual funds according to their risk appetite and individual goals.