When it comes to investing in mutual funds, many investors are unsure whether they should choose Active or Passive Mutual Funds. If you already invest in mutual funds or are planning to start a new SIP, it’s important to understand the basic differences between these two types of funds. By doing so, you can choose the right fund and potentially earn better returns on your investment. Let’s explore the key differences between these two types of funds.
What are Active Funds?
Active funds are mutual funds managed by professional fund managers who decide which stocks, bonds, or other securities to buy or sell. The goal of an active fund is to outperform a specific benchmark index by making strategic investment decisions and timing the market. In other words, the fund manager can choose investments based on the fund’s objectives. However, because the manager plays a significant role, the fund’s expenses tend to be higher. Investors expect actively managed funds to outperform the market.
Key Features of Active Funds:
- Professional fund management
- Higher expense ratio
- Potential for higher returns
- Investment flexibility
- Higher risk
What are Passive Funds?
Passive funds, also known as index funds, aim to replicate the performance of a specific market index. Rather than trying to outperform the market, passive funds aim to match the returns of a benchmark index. For example, a passive fund tracking the BSE Sensex will buy only the stocks included in the BSE Sensex, with each stock’s proportion matching its weight in the index. These funds mirror the index’s performance, without attempting to beat it. They are also referred to as index schemes.
Key Features of Passive Funds:
- Track a specific index
- Lower expense ratio
- Performance mirrors the index
- Transparent investment approach
- Lower risk
Which is Better for Common People in India: Active or Passive Funds?
For most people in India, passive funds are better because they are simple, low-cost, and give steady returns. These funds follow an index, need little effort, and are good for long-term investments. They also have lower risk, which is helpful for beginners. Active funds may give higher returns but come with higher costs and risks. They also need more knowledge and attention. For most common investors, passive funds are the better choice.
Disclaimer: The information provided is for general informational purposes only. Times Bull is not responsible for any financial investments made, as it is entirely your responsibility. Please consult a financial advisor for better results.