After the statement of the warren buffet, a lot of Indians have started to invest in index funds and active funds. Although do we really know the difference between active funds and index funds? Let’s answer the common question: where to invest? 🤔
1. Active funds:
When you opt for active funds, fund managers invest your fund in the market as per their research and analysis. They are responsible for taking decisions related to trading. 👨🏻💼
2. Index funds:
Index funds copy the pattern of an index that is already pre-set. 🤷🏻♀️
(small cap index fund: return as per small cap’s growth
mid-cap index fund: return as per the mid cap’s growth
and the pattern continues. )
Where to invest? 💭
🤞🏻 When it comes to index funds, you can invest in small-cap, mid-cap, large-cap, nifty 50, etc. as per your personal choice. If you invest in small-cap, your return totally depends on how small-cap performs. 👀
( With index funds, You get restricted to the performance of one particular cap )
Whereas, in the active funds, you can invest in multi-cap. When you go for active funds, the fund manager can decide to invest as per the research. When the market gets overvalued, the manager can pull out money from either of the caps and invest in one or more caps. 🧐
🤞🏻An active fund can set aside 35% of the fund (recognized as equity fund) and invest in the market when it stabilizes. The fund manager does it to maximize the returns. ( Fund manager’s smart moves can lead to higher returns with active funds )
Whereas, an index fund invests 100% of the fund irrespective of the market conditions. Index fund never waits for the averaging of the market. 😏
🤞🏻Even though active funds look like a smart choice, sometimes due to the poor decisions of fund managers, active funds remain unable to match the returns of index funds.
Even after a lot of research, active funds may end up giving similar returns or even lower returns as that of index funds
Therefore, if you opt for active funds, it is very important to choose the right active funds which have a history of giving out higher returns. 🧠
There are a few active funds which have outperformed index funds consistently even by a difference of 10%! 😃
🤞🏻 The expense ratio of index funds is way less than active funds
The fee of index funds is around 0.1%, whereas the fee of active funds is around 1%. Index funds save you approximately 1% return readily.
Although, it would be even smarter to pay the 1% fee extra and select the right fund manager for your active funds.
Summing it up with logical recommendations
👉🏻 Need high safety: invest in Sensex/nifty index funds
👉🏻 Need a higher interest rates than FD (10-12%): Invest in large-cap index funds
👉🏻 Need to maximize the wealth (highest return possible): Invest in multi-cap active funds
Remember:
Higher the risk, the higher the return
I hope you’re clear with the pros and cons of active and index funds.
Make your move after your fair share of research! 😇🤞🏻
