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Passive or Active: Both mutual fund options have an edge 

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Passive or Active

Passive or Active: Both mutual fund options have an edge 

Think of an athlete’s diet. It includes carbohydrates, proteins, iron, and essential vitamins. These need to be consumed daily, with tweaks based on the training requirements. An athlete may not always have the time and resources to create a diet plan. That is why expert nutritionists exist. The same principle applies to investment decisions, too.

 

A single investment is not likely to fulfil all your financial needs. So, depending on your appetite for risk, you could meet your investment goals by choosing between equity and debt instruments. Here, mutual funds offer multiple fund combinations as part of this selection bouquet. Expert fund managers look at the market conditions and make adjustments to the mutual fund portfolio to maximise the end returns.

Within mutual funds, there is an array of options available. These include various schemes under passive or active funds. Passively managed funds do not need any manual intervention and typically track benchmark indices, such as Sensex and Nifty. Active funds, on the other hand, are designed to beat the market performance and expert fund managers actively manage them.

Whether it is active or passive funds, both these mutual fund options have their advantages. These mutual fund schemes offer an opportunity for wealth creation and wealth accumulation over the long term.

You could invest in MFs at the click of a button on the Standard Chartered SC Invest platform.

How do they work?

Under mutual funds, active and passive are two broad categories. Both these funds differ in the areas of expense, returns, and strategy.

Let us break this down:

  1. Expense: Since active funds require round-the-clock monitoring by a fund manager, these schemes are more expensive than passive funds. Passive funds have fixed expense ratios for each scheme, based on the index that it is linked to. For debt schemes, the maximum expense ratio allowed is 2% while for equity schemes it is 2.25%. This is calculated as a percentage of the daily net assets.
  2. Returns: Passive funds are benchmarked to an existent index, and hence, their returns are similar. For instance, if Nifty50 has an annual return of 5%, the passive fund’s returns will mirror it. However, active funds aim to outperform the markets. So these funds potentially offer higher returns. Each active fund’s returns will differ based on how the fund manager tweaks the underlying investment book.
  3. Strategy: Fund managers do not have a role to play in passive funds because these are auto-linked. Active funds, on the other hand, need agile fund managers to make buy and sell decisions based on market conditions. The returns in an active fund are directly proportional to the fund manager’s track record. Passive funds, on the contrary, do not need any strategic planning and simply follow the broader market movement.
    However, even within active funds, there could be differences. When there is a situation of extreme market volatility because of external factors, fund managers in active funds could opt for “index hugging”. This refers to an investment method where the fund tracks a benchmark index. Here, the fund manager will make some changes in the equity or debt instruments on a regular basis while following one index as a guide.

    While your fund manager keeps track of market volatilities, it could be beneficial for you as an individual investor to stay informed, too. Expert insights from Standard Chartered could help you become better prepared for unpredictability.

    Making the choice

    Your life goals, financial position, and capacity to take risks could help decide whether to opt for active funds or passive funds.

    If you can afford to pay higher fees with the aim of getting higher-than-market returns, there are active fund options. However, if you want to earn returns to map the market indices, passive fund options exist to meet those needs. Fund performances of each mutual fund scheme could be tracked regularly to get a better understanding of which scheme to invest in.

    For investors with the ability to use numerous MFs, both passive and active funds can be added to this mix. This means that you could get exposure to fixed returns mirroring the market, as well as added benefits of earning higher returns on certain schemes.

    If this investing process sounds complex, you could also opt for the pre-generated SIP packs available on SC Invest.

    Each investor is different. Hence, there is no one-size-fits-all approach to investing in mutual funds. Since the markets are dynamic, your investment duration will also play a key role in whether to opt for active or passive MFs. The final decision is yours, though inspecting the MF fund manager’s returns track record could come in handy.

     

 

Disclaimer:

This article is for information and educational purposes only. It is meant only for use as a reference tool. It has not been prepared for any particular person or class of persons. The products and services mentioned here may not be suitable for everyone and should not be used as a basis for making investment decisions. This article does not constitute investment advice, nor is it an offer, solicitation, or invitation to transact in any investment or insurance product. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Prior to transacting, you should obtain independent financial advice. In the event that you choose not to seek independent professional advice, you should consider whether the product is suitable for you. You should refer to the relevant offering documents for detailed information.

Standard Chartered Bank is a distributor of mutual funds and referrer of other third-party investment products and does not provide any investment advisory services as defined under the SEBI (Investment Advisers) Regulations, 2013 or otherwise. Investments are subject to market risk. Read scheme-related documents carefully prior to investing. Past performance is not indicative of future returns.