Types of mutual fund investment : Passive Fund Vs Active Mutual Fund

Advantages of Passive / Index Fund.

1. It is a more safe investment than Active Mutual Fund. Investor’s money gets passively invested across all stocks of Index. Investors money get diversified in all stocks consisting in that index.

2. It gives a steady return which is the same as the returns of the index it is following. This will give Capital appreciation in the long run.

3. No manual intervention. No Need to hire professional managers to manage AUM. As investors, money gets passively invested in all stocks of a particular index. Minimum manual intervention is required. Expense Ratio is less. We can say the Expense ratio is nominal.

4. Less tracking is required. There is no need to compare the performance with the benchmark index.

5. For investing in a Passive Fund / Index Fund, less financial expert knowledge is required. With minimum financial knowledge, one can create an Index Mutual fund portfolio.

Disadvantages of Index Fund

1..Index funds cannot beat the returns of the market. In other words, it will not beat the return of the index it is following. Almost all index funds have tracking errors. Tracking Error of an Index fund is the difference between the returns of index fund vs the actual returns of benchmark index.

2..Index funds cannot rebalance their portfolio like Active Mutual Funds. Depending upon the dynamic market condition, active mutual funds rebalance their portfolio. Index funds have no control over Portfolio holdings.

3..There is no downside protection in the Index Fund.

AUM:- Asset Under Management..  Investor’s  worth is handled by Mutual fund

(2) Active Mutual Fund

Active Mutual Funds are managed by professional managers. Fund managers are well-qualified and have experience in the field of investing. They invest Investor’s money wisely in the stock market and will fetch good returns. Top active mutual funds easily beat the benchmark index and its followings. Actively managed Mutual Funds are available in different categories.

The most popular categories are Large Cap / MID Cap / Small Cap fund / Flexi Cap fund / Multi Cap / Thematic funds. These types of funds have a high expense ratio as compared to Index funds. But it is worth giving this Expense Ratio to mutual funds because they will deliver extra returns on your investment.

Advantages of  Active Mutual Fund:

1. With Professional management, there is no limit to returns given by top active mutual funds.

2. Active mutual funds are flexible and adaptable to market conditions. They can change their portfolio depending on market needs.

3. A team of experts adds various advantages to Active Funds over passive funds.

4. You can easily diversify your portfolio into different stocks and assets.

Disadvantages of Active Mutual Funds

1.. High expense ratio. Investors have to pay a high expense ratio on top-performing active mutual funds.

2. Many Active Mutual funds in the long run don’t beat the returns of their benchmark index.

3. Suppose the Performing Fund Manager gets a good job offer from another fund house, he can shift his job. This will affect adversely on performance of the Mutual fund.

Where to invest Index Fund or Active Fund.

If you are a safe and steady investor you can go with Passive investing in an Index fund which will give you returns of 13 to 14 % as per benchmark index performance. But if you are an aggressive investor then you should go with Actively managed Mutual funds. Here fund manager will choose performing stocks from the market and invest in them. Active Mutual Funds can give returns much more than their Benchmark Index. An Index Fund cannot beat the returns of the index it is following. Index fund at the most gives returns like their index. This is the main limitation of index funds. There is no limit to returns in Active Mutual Funds.

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