MoneyMindz.com, Best On-Call Financial Advisory Portal talks about passive investing. Index funds are such mutual funds that try to replicate its performance of a particular index. Unlike other mutual funds, where fund manager performance is judged on the returns he delivers over and above the returns of the index that is a benchmark, in Index funds the endeavour is to have the same returns which index is generating.
How do Active Mutual funds work differently than Index funds?
Active funds do not go by Index composition. They take it as a benchmark but are not bound to be in the same proportion of stocks and in the same ratio as in the Index. The fund manager will do their own research and make estimates about the future growth of the stock and thus keep or sell out of the fund’s portfolio. However, since they have to beat the index to show their worth to the investors, they take the well-researched call, which may or may not prove be correct. And this is where the Risk and Return factors of the fund manager come into the scene.
Why should one look out for Index funds in India?
Let us have three reasons:
1. It is a new thing to discuss. Though Index funds are old but the discussion is new or has regained importance. Everyone likes to know “What’s new?”. So, you are getting what you are looking
2. In today’s era when the focus is more on cost, the lower costs product will surely gain attention. Value or benefit becomes secondary criteria when costs are less.
3. One major expectation of success of index funds in India overActive funds is the SEBI Recategorization of Mutual funds, strictly defining the Investment space and benchmarking to TRI indices.
Should one go with Index funds in India or not?
Is it important to understand how Index funds work? Active and Passive investing style both have their own advantages and disadvantages. Where fund manager takes an informed decision while selecting stocks, it is always difficult to beat the one-sided index, especially the rising one, which sometimes is due to the performance of only a few stocks.
And with the restrictions that SEBI has put in, the fund performance vis a vis Index may get hit over a period of time. But still, it may not be wise to completely shun the Active funds, and also not ignore the Index funds too.
Index funds can be added in large-cap allocation just to diversify the Fund Manager Risk of wrong selection of stocks and not beating the benchmark. But going 100% Passive also may not make sense to me at least for now.
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