ACTIVE VS PASSIVE FUNDS WHICH ONE SHOULD YOU CHOOSE

Recently Sensex touched 60,000, which is a historical achievement. However, whenever Sensex reaches a crucial milestone like the one in the present, many investors, particularly new investors, are in a frenzy to gain additional profits. If you are one of those investors, here’s some advice to help you choose better Mutual Fund Investments.

When you consider investing in such a market, the first thing that comes to mind is where I should start investing? Or what plans are ideal for me? Market expert advisors at Mfonline have a thoughtful response. However, the foundation of the mutual fund investment remains the same: one should invest according to the risk profile and horizon of investment.

Mutual funds are of two types: active and passive, based on the investing approach of fund managers. The preference of investors for one or the other relies entirely on their profits and risk appetite.

Portfolios of mutual funds can be managed actively or passively. When we say management of the portfolio, we mean how the fund manager buys and sells the underlying assets (stock, bonds, other securities, and gold).

Any fund which is actively managed by the fund manager is called an active fund. The fund manager of an active fund decides to buy & sell underlying securities as per the mandate of this fund using his discretion, whereas, in passively managed funds, the fund manager replicated the index on which the fund is benchmarked, e.g., Nifty 50 An index fund will have portfolio mirroring(copy) the Nifty 50 & the fund manager cannot decide on his own to include any other stock.

But let us fully grasp these two concepts separately before we get into active V/S passive funds in India.

WHAT ARE ACTIVE FUNDS?

In actively managed funds, funds are purchased and sold to maximize profits. The Fund Manager is primarily responsible for conceptualizing and picking out reasonable investments to execute a stock that exceeds the fund’s benchmark or index.

Therefore, A fund manager needs knowledge, in-depth study, and extensive know-how to determine how securities are bought and sold. Although the fund manager is responsible for making decisions as per his will, it should be in line with the investment objective of the Mutual fund investor. That stated it might be costly to choose an active fund choice. The reason is that a fund manager’s competence entails fees. Depending on the fund’s equity-debt direction, the expenses ratio generally ranges between 0.08 and 2.25%.

In active V/S passive funds, now let us study what passive funds are.

WHAT ARE PASSIVE FUNDS?

A fund manager is not actively involved in the portfolio management of passively managed funds. Rather, they only aim to duplicate a benchmark’s performance. Unlike active funds, their passive equivalents have a buy-and-hold strategy that seeks to mirror a market index’s returns.

The ETFs are passively managed. The fund manager does not regulate the Exchange-Traded Funds, but with ETFs, the fund follows and tracks the index movement. ETF’s are not at the discretion of fund managers but SEBI. The index returns are converted to the ETF returns. Under the expense ratio charges, management charges, or other fees or dividends could be some of the differences.

PROS AND CONS: ACTIVE V/S PASSIVE FUNDS.

Both these funds are unique in their way, so let us look at some pros and cons of active v/s passive funds, respectively.

PROS AND CONS OF ACTIVELY MANAGED FUNDS

Additional Returns: Active funds attempt to exceed market indexes and hence generate alpha (additional returns).

CONS

Expensive: A funds manager’s expertise comes with a price. For knowledge and decision-making of the fund manager, investors will be charged (mainly the expense ratios).

Risk: Actively managed funds aim for higher returns; hence, these funds involve high risk.

PROS OF PASSIVE MANAGED FUNDS

Cheaper: In comparison to actively managed funds, the expense ratio is lower in passive funds. The expense ratio for ETFs cannot exceed 1 percent under the SEBI Regulations.

CONS OF PASSIVE MANAGED FUNDS

Benchmark: Passive funds generate moderate returns. As these funds follow the index benchmark, that is why the returns would be equal to its benchmark.

DIFFERENCES BETWEEN ACTIVE V/S PASSIVE FUNDS

ACTIVE V/S PASSIVE FUNDS: WHICH ONE SHOULD YOU CHOOSE?

Our MFOnline specialists think that Active V/S Passive funds cannot be selected or compared. It relies totally on the investor’s aim and its risk tolerance. If an investor, for instance, desires more significant returns, he may choose an active fund based on his ability to take risks. In the same way, a risk-averse investor who searches for stable income may opt to invest in passive funds. The difference between active and passive funds is more because of their features rather than any fund.

It is best to have both funds in your portfolio since one can provide more extensive returns than the market, and the other can generate relatively small but consistent gains for you.

Disclaimer: Mutual fund investments are subject to market risk; read all scheme-related documents carefully.

BENEFITS OF MUTUAL FUNDS

Mutual Funds are one of the most commonly known investments in the Indian market. A large number of Indian households have their money invested in these funds for all good reasons. A Mutual Fund is a professionally managed fund that gathers money from many investors to invest in shares & bonds.

Let me quickly explain to you in simple words how it all works. A fund is started usually by an institution. These institutions appoint the most experienced financial market experts, and then several retail and institutional investors invest in the fund based on its credibility. The most important responsibility the experts have is, making sure the money gathered from the people is invested in the best securities possible. They invest in the best securities in the market, based on the type of mutual fund. The value of which is decided by dividing the number of shares by the amount of money invested in it. Thus, whenever the investor wishes, he can sell his share in the mutual fund and enjoy the profit.

In today’s market, there are several benefits of mutual funds and in this article, let’s talk about a few of them.

DIVERSIFICATION

Mutual funds are the best way to diversify your investments. There are several financial market experts that are dedicated to the funds you invest in. They make sure the fund is diversified in the best way and the best securities. The diversification of your investment assists enormously in mitigating risks and also enhances the possibility of profits. The best mutual funds are the ones with good returns with the least risk. An efficiently diversified fund will always be fruitful in the long term.

LIQUIDITY

One of the most notable benefits of mutual funds is liquidity. There are several investments in the financial market, but most of them are either highly risky or highly illiquid. Mutual funds are where it all comes together. You can pull out (redeem) your investments from the fund anytime you feel the need to and invest any time as well. In fact, now there are also funds that provide an instant redemption facility, under which the money is transferred into your bank account t the very day you redeem it. However, in some cases, the exit load can be levied.

A HASSLE-FREE INVESTMENT

With Bhalla Investors, Mutual funds become a very simple investment. With the right advice and assistance, you can easily invest in mutual funds without any unnecessary hassle. All you have to do is register yourself on the website, and the executives will take care of the rest for you.

EXPERT MANAGEMENT

Every mutual fund is managed by a group of professional financial experts. They have a keen understanding of the securities and financial markets that the fund is invested in. The experts constantly monitor the markets for you and keep an eye on every movement in the market, making sure your risk is minimum and the profit is maximum. One of the most crucial benefits of mutual funds is the fact that they are constantly managed by these experts.

REGULATED

Mutual funds are well regulated under the SEBI guidelines. They are constantly monitored by SEBI to make sure the mutual fund houses are following their guidelines. The mutual fund houses are also required to disclose their portfolios each month to ensure 100% transparency.

OPTIONS OF INVESTMENT

Under mutual funds, you have different options to invest. For example, you can invest a lump-sum amount and wait for it to grow over a period of time. Or you can invest small amounts every month in the form of SIP. SIPs mean systematic investment plans. These investments are a pretty good idea because they average your investment over a period of time and even help in averaging out losses. For some of the Best Mutual Funds for SIP, read this blog.

TAX BENEFITS

Mutual funds provide several tax benefits based on the type of investment. For instance, under Equity Linked Saving schemes, you can save up to 1.5 lakhs every year. Several investors are attracted to this investment specifically because of the tax benefits. These schemes have three-year lock-in periods.

LOW LOCK-IN PERIODS

Mutual funds have very low lock-in periods if any. The highest lock-in period for a mutual fund is three years, much less than other low-risk funds such as FDs, ULIPs, et cetera. However, there are also funds that have absolutely no lock-in periods. These funds are called Overnite funds, which are specially created for increased liquidity.

These are the top benefits of mutual funds in 2021; for the best advice and ideas regarding the best investment, you can always contact the experts at MFonline.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.