Index Fund vs Actively Managed Fund : What’s Better in Current Scenario?

Index fund have gained high popularity in recent past. A while ago, everyone was claiming Mutual Fund Sahi hai. But off-late, index funds have emerged as new recommendation. This makes sense to extent as index funds are low cost.

When we say above, low cost means that index funds has lower expense ratio than mutual fund.

For example, One of the index fund with 0.3% expense ratio in regular plan and 0.1% in direct plan is HDFC Index Fund – Sensex.

And on the other end, an example could be Invesco India Multicap Fund. It is one of the decent performing multicap funds. But the expense ratio is as high as 2.46% in regular plan, and 0.95% under direct plan.

Hope this clarifies the first assertion that Index Fund is less expensive than multi cap funds.

With that being said, obviously everyone would like to incline towards index fund than into multi cap fund. But there are several other parameters as well. Lets discuss all attributes.

Index Fund vs Actively Managed Fund : Sources for Comparison

In order to understand the mutual funds collectively, we considered approx 250 funds. All their details were picked up from sources like morningstar. For better analysis, we are segregating mutual funds into following categories.

  • Large Cap Funds
  • Mid Cap Funds
  • Small Cap Funds
  • Multi Cap Funds
  • Value Funds

Here is the collective return figures that we compiled for each category:

SLMutual Fund3Y Return5Y Return10Y Return
1Index Fund14.70%12.00%15.00%
2Large Cap13.00%14.00%16.60%
3Mid Cap13.60%19.00%22.30%
4Multi Cap13.40%15.00%18.30%
5Small Cap12.00%17.80%20.40%
6Value Fund14.80%16.90%20.20%

For a period of 3 years, Index fund vs actively managed fund have almost same returns. Similarly Mid Cap, Multi Cap and Large also had same returns.

However, if we see the numbers for higher time frame, then the returns are different. Interestingly, index fund gives 15% return for 10 years duration. Whereas mid cap gives return of 22.3%.

This means that if you would’ve invested 25,000 per month in mid cap fund then the corpus would’ve been around Rs 1.1 Crore. And same investment of 25,000 per month in index fund would’ve fetched a corpus of 70 Lacs.

However, if it is for smaller duration then it is better to go with managed funds as returns are almost similar and volatility i.e. risk factor is less.

Ankit Maheshwari

Ankit is an avid writer with experience of working Investment Banking domain for over 7 years. He has been tracking Indian markets for over 10 years now for educational and learning purpose.

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