Active vs Passive Funds: Expert Decodes Which is Best For Your Portfolio And How: Money Matters
One debate is constant when it comes to investing: active vs passive funds. Our expert, Mr Gaurav Goel, Entrepreneur and SEBI Registered Investment Advisor, broke down the fundamentals for us, explaining the two options and exploring the pros and cons. Read on to learn more.
Active vs Passive Funds: Understanding the Basics And Warren Buffet’s Bet
Mr Goel said, “The Active Vs Passive Funds debate has been going on when it comes to the world of investments.” The expert cited a story of Legendary investor Warren Buffet who has been a big advocate of passive funds and for valid reasons. “In fact, his conviction was so strong that he famously placed a bet of USD 1 million that S&P 500 index fund would outperform a basket of hedge funds over a 10-year period. In 2008, Tom Seides of Protégé Partners accepted the challenge. Buffet prevailed, with Seides conceding the bet even before the decade had finished. Active managers theoretically have greater access to market information, expertise and knowledge as compared to a common man. Their Achilles heel perhaps lies more in behavioural patterns and their over indulgence in timing the market which has historically proved ineffective,” he added.
Studies Show: Passive Funds Outperform Active Funds in Certain Environments
“Several studies have been conducted, more in the western world, over the last several decades to find out if passive funds perform better than active funds. Usually, one full cycle, consisting of a bull and bear phase should be considered for drawing any meaningful conclusion. It has been generally observed that in an environment where interest rates are going down, these low volatility funds or passive funds tend to perform better than other funds. However, in a rising interest rate environment, active funds generally tend to perform better. Index funds (passive) have lower expense ratios and hence over a period of time this differential compounding gives reasonably higher returns, other things remaining the same,” shared the expert.
Indian Context
Don’t Miss:Worried About Money Flow After Retirement? 5 Ways Real Estate Can Help You
Mr Gaurav explained, “On an aggregate basis, even in Indian context, the above statistics appear true. However, the answer to this question lies in the ability of an investor to identify a good fund manager or ‘catch the remaining 15%’.
“In the Indian context, we have a decent number of such fund managers who have consistently outperformed Index fund returns over long periods of time. It should be noted that Indian markets are not as mature as US markets. The size of the mutual industry (ELSS Mutual Funds) in India is much smaller. The expense ratio of passive funds is very high as compared to western world even if it is less than the active funds,” he added.
Gaurav continued, “When it comes to investing, many of us rely on word of mouth or professional advice, but this may not always lead us to the best fund managers. To make informed decisions, investors need to dig deep into a fund manager’s philosophy, market expertise, and track record. However, this level of research can be daunting, even for seasoned investors.”
Don’t Miss:Big Changes in EPFO: Withdraw Your Money Anytime – 7 Key Updates You Need to Know
“That’s where seeking guidance from qualified professionals can be invaluable. Ultimately, the choice between active and passive funds depends on individual circumstances. While some investors may thrive with active funds, others may find passive funds a more suitable option. A balanced approach, combining the benefits of both, can also be a savvy strategy, allowing investors to diversify their portfolios while optimising returns,” he states.
If you liked this story, then please share it. To read more such stories, stay connected to HerZindagi.
Image Credits: Freepik