When investing in mutual funds, investors can choose from a wide range of categories. Although the funds can range from debt to equity, large-cap to small-cap and from gold to sectoral, two broad categories of mutual funds are active and passive.
Those who are not aware, active funds are those mutual funds wherein fund manager actively manages the portfolio by keeping track of investments, whereas in the passive schemes –as the name suggests – fund managers do not have any discretionary choice. They only track other popular indices by investing in the same proportion of stocks as that particular index does.
As a result, one can imagine that active mutual funds are riskier than passive funds but offer a greater scope to earn gains.
Why should you opt for active mutual funds?
1. When you aim for greater returns: As an aggressive and ambitious investor, if your goal is to beat the market index, you can choose to invest in an active fund.
2. When you are confident of a particular theme or sector: Sometimes fund houses roll out special funds targeting a specific sector or a theme based on their own assessment of future market conditions. If you also have a conviction in that theme or sector, you can jump on the bandwagon and invest.
For instance, Bajaj Finserv launched a BFSI fund. One would decide to invest in this fund only if they have confidence in the theme’s potential for growth.
3. Fund manager has a stellar past record: When the fund manager who is managing the scheme has a stellar past, there is one more reason to invest in that fund. For example, HDFC AMC had Prashant Jain until 2022, who was known for his exceptional performance.
“Although there are several differences between these two categories – the major one lies in the fact that active funds are riskier with the fund manager taking most investing calls, whereas passive funds simply follow an existing popular index such as Nifty50 or Nifty IT index,” says Deepak Aggarwal, a Delhi-based chartered accountant and wealth manager.
Why should you opt for passive mutual funds?
1. When you are a conservative investor: Since active funds are meant for the ambitious investors, you can choose their passive counterparts if you are a more conservative investor.
2. When you want to invest for the long term: If your long-term goal is to grow your portfolio 5X or 10X and you are confident of Nifty50 or Sensex to attain this goal, then you can simply invest in a passive fund instead of risking your money by choosing active funds.
3. When you are confident of a particular index: Sometimes, you are very sure of a particular index such as Nifty100 or NiftyMidCap 100, it is quite understandable to invest in passive funds in that scenario.
Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.
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