Note4Students
From UPSC perspective, the following things are important :
Prelims level: Active and Passive Equity Funds
Mains level: NA
Central Idea
- Mutual fund investors are currently favouring active equity funds over passive funds, according to a recent study.
Active vs. Passive Equity Funds
Active Equity Funds |
Passive Equity Funds(Index Funds/ETFs) |
|
| Investment Strategy | Actively managed by fund managers | Passively track a specific benchmark index |
| Research and Analysis | In-depth research and analysis to select individual stocks | No active stock selection or market timing; follow benchmark index composition |
| Portfolio Turnover | Higher turnover; frequent buying and selling of stocks | Lower turnover; minimal changes to match index composition |
| Fees and Expenses | Higher management fees and expense ratios | Lower management fees and expense ratios |
| Performance | Performance varies widely; aims to outperform the benchmark | Seeks to match benchmark index performance |
| Diversification | Diversification depends on the fund’s holdings and strategy | Offers broad diversification based on benchmark index |
| Tax Implications | Potential capital gains tax from frequent trading | Generally lower capital gains tax due to lower turnover |
| Suitability | Suited for investors seeking potential alpha (outperformance) | Suited for cost-conscious investors seeking index-like returns |
| Active Management Risk | Subject to fund manager’s stock-picking skills and market timing | Minimal active management risk; returns closely track the index |
| Investor Involvement | Less hands-on; rely on fund manager’s decisions | Passive investing; no need for frequent monitoring |
| Examples | Mutual funds with active management | Index mutual funds, Exchange-Traded Funds (ETFs) |
| Common Benchmarks in India | Sensex, Nifty 50, BSE 100, etc. | Sensex, Nifty 50, Nifty Next 50, etc. |
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