Ventura Research Desk: The article for this month, “Should you invest in an Active or Passive Fund?” explains both these types of funds, compares their performance and finally, helps you to decide which fund you should opt for. The top performing equity and debt mutual fund schemes are highlighted on Page 6 and 7. Happy Investing!! Juzer Gabajiwala • The Sensex and Nifty 50 rose by 3.05% and 3.31%, respectively, in the month of March 2017. The positive momentum continued for the third consecutive month as sentiments were mainly boosted owing to the landslide victory of the BJP in the Uttar Pradesh assembly elections. The market rose further after the Goods and Services Tax (GST) Council cleared two supporting bills, paving the way for the implementation of the new tax regime by July 1. Investors were also enthused after the US Federal Reserve (Fed) signaled a slower pace of monetary tightening through the year. • The Consumer Price Index (CPI) for Feb rose to 3.65% against 3.17% in Jan on account of firmer food and fuel prices. This reduces any possibility of a rate cut by the RBI in the upcoming monetary policy meeting. Also, the 10-year G- Sec yield fell by 24 bps to end at 6.68% compared to 6.92% last month. The Index of Industrial Production (IIP) rose by 2.7% in January, mainly on account of a rebound in manufacturing output, which grew 2.3%. • According to data released by SEBI, FIIs were net buyers in the equity markets during the month of March 2017, with a total purchase of Rs. 31,326 crore. Mutual funds were also net buyers with total purchases of Rs. 2,367 crore. March, 2017 1 March, 2017 Should You Invest in an Active or Passive Fund? Issue - 135
Transcript
Ventura Research Desk:
The article for this month, “Should you invest in an Active or Passive Fund?” explains both these types of funds, compares their performance and finally, helps you to decide which fund you should opt for. The top performing equity and debt mutual fund schemes are highlighted on Page 6 and 7.
Happy Investing!! Juzer Gabajiwala
• The Sensex and Nifty 50 rose by 3.05% and 3.31%, respectively, in the month of March 2017. The positive momentum continued for the third consecutive month as sentiments were mainly boosted owing to the landslide victory of the BJP in the Uttar Pradesh assembly elections. The market rose further after the Goods and Services Tax (GST) Council cleared two supporting bills, paving the way for the implementation of the new tax regime by July 1. Investors were also enthused after the US Federal Reserve (Fed) signaled a slower pace of monetary tightening through the year.
• The Consumer Price Index (CPI) for Feb rose to 3.65% against 3.17% in Jan on account of firmer food and fuel prices. This reduces any possibility of a rate cut by the RBI in the upcoming monetary policy meeting. Also, the 10-year G- Sec yield fell by 24 bps to end at 6.68% compared to 6.92% last month. The Index of Industrial Production (IIP) rose by 2.7% in January, mainly on account of a rebound in manufacturing output, which grew 2.3%.
• According to data released by SEBI, FIIs were net buyers in the equity markets during the month of March 2017, with a total purchase of Rs. 31,326 crore. Mutual funds were also net buyers with total purchases of Rs. 2,367 crore.
March, 2017 1
March, 2017
Should You Invest in an Active or Passive Fund?
Issue - 135
March, 20172
Global markets showed mixed trends during the month of March 2017, with the CAC 40 gaining the most. Among the Indian benchmark indices, the S&P BSE Sensex and Nifty 50 rose by 3.05% and 3.31%, respectively, in March 2017.
*Returns as on Mar 31, 2017. Funds having AUM above Rs. 100 Crores are considered.
*Returns as on Mar 31, 2017.
DSPBR Natural Res & New Energy 63.15 ICICI Pru Technology Fund -2.98FundICICI Pru Banking & Fin Serv Fund 56.34 Franklin Infotech Fund 0.80SBI Magnum Comma Fund 49.69 Reliance Pharma Fund 3.12Birla SL Banking & Financial 44.31 SBI Pharma Fund 3.27 Services FundTata Banking & Financial Services 43.99 UTI Pharma & Healthcare Fund 4.07Fund
UTI Gilt Adv-LTP 16.95 Taurus Ultra ST Bond Fund -5.49
SBI Magnum Gilt-LTP 14.66 Taurus Liquid Fund -0.51
IDFC G Sec-PF 14.46 L&T Cash Fund 6.03
UTI Dynamic Bond Fund 14.41 Franklin India CMA 6.11
Reliance Gilt Securities Fund 14.19 MOSt Ultra ST Bond Fund 6.14
March, 2017 3
Nowadays we see a lot of experts and investors debating on whether it is more beneficial to
invest in active or passive funds. Before getting into the debate, here is some information,
which will help us come to a conclusion:
What are Active Funds and Passive Funds?
Active Funds:
Active funds are managed with the main objective of generating a return which is higher than
the market/benchmark index. This excess return is called Alpha. The fund manager has
complete freedom or leeway while constructing or managing the portfolio, except for regulatory
restrictions and the fund house’s internal policy framework. So effectively, a fund manager,
managing an active fund, can decide on stocks selection (which stocks to buy and in how much
proportion), market timing (when to buy or sell), etc.
Passive Funds:
Passive funds, on the other hand, are
managed with the main objective of
generating a return that is in line with the
benchmark. It is a “no-brainer” for the fund
manager managing the fund as he or she just
needs to merely mimic the benchmark
portfolio. The fund house and the fund
manager do not enjoy any discretion while
selecting stocks or taking buy or sell
decisions. When funds are received from
Should You Invest in an Active or Passive Fund?
March, 2017 4
investors, they are invested in the same proportion as the composition of the benchmark and
when there are redemptions, the sale of stocks is in proportion too. For example, a fund tracking
the Nifty index will buy exactly the same stocks present in the Nifty and in the same proportion
as they comprise the index. Also, in case there are any changes in the composition of the Nifty
index, like perhaps the removal of ABC stock and addition of XYZ stock, the same changes need
to be replicated in the fund as well. Thus, these funds are usually less volatile compared to
active funds and they ideally move in tandem with the index to which they are aligned. Since
passive funds do not require active research and stock picking, the expense ratios are much
lower than that of active funds.
Features / Performance: Below is a comparison of Active and Passive funds in terms of
number of schemes available for investment, Assets Under Management (AUM) and
Performance across different time periods.
For the Active Funds category, we have considered all Equity-Diversified funds (Large Cap/ Multi
Cap/ Mid and Small Cap funds, except ELSS funds), Sectoral (Banking/ Pharma/ Infra, etc.) and
Thematic funds. Under Passive funds, all the funds tracking the Nifty and Sensex, except one
fund tracking mid cap index, have been included. Thus, investors investing in passive funds are
missing out on the whole mid and small cap rally due to very limited choice of funds tracking mid
and small cap index. Also, there are currently a total of 47 indices comprising of Nifty 50, Nifty
Bank, Nifty FMCG, Nifty IT, Nifty Media, Nifty Infra, etc.
Data as on Mar 31, 2017
As seen from the above table, the Equity diversified category’s best fund return on a 5 year basis
is more than 2.4 times that of the Index funds’ best fund return. Almost 97% of equity
diversified funds returned more than 11% p.a. on a 5 years basis.
The index fund universe comprises of 19 funds only whereas there are 167 funds in the equity-
diversified fund universe. Also, the AUM managed by index funds is only Rs 2,144 crores.
March, 20175
Should I opt for Passive or Active Funds?
Having understood the differences between Active and Passive funds, the bigger question now
is what option should you choose? We will restrict our understanding only to the Indian markets
and Indian mutual funds space.
The average expense ratio (fees charged by mutual fund houses for managing your money) for
passive funds and active funds is 0.90% p.a. and 2.40% p.a., respectively. Thus, there is an
impact cost of 1.5% for investors investing in active funds and hence, these funds need to
generate 1.5% higher returns than passive funds in order to even the odds. However, as seen
from the table of comparison, the differential return between equity diversified and index funds
is positive 2.4 times on maximum return basis.
India is still a developing economy and there are many companies or sectors with a lot of
opportunities and scope for growth. This is due to the fact that in our markets, the potential of
some sectors and companies has not been discovered, unlike the case of global markets, where
most sectors have been well and fully researched. We do not see this situation in India at-least
for the foreseeable future as the guidance provided by Indian companies is not very accurate
and also, the Indian economy is expected to do well compared to other emerging economies.
Further, we are still a nascent economy compared to the US. The company with the highest
market cap in India is TCS, whichis valued at USD 73.15 bn; this is only 10% of the market cap
of Apple Inc. (one of the top companies in the US), whose market cap is USD 752.51 bn. Thus,
TCS, which is a large cap company in India, is equivalent to a mid or even small cap company in
the US.
Conclusion: India presents a lot of investment opportunities and active funds should continue
to outperform passive funds, at least until passive funds manage a relatively small corpus of
funds and track a limited number of indices. Also, most importantly, active funds should do well
when the variance between the minimum and maximum return is wider. Passive funds should
do well once this variance narrows down in future.
March, 20176
15,043 29.03 11.77 10.22 11.16 10.07
4,707 20.16 10.34 13.09 11.41 10.11
2,254 32.7 12.41 10.33 9.59 9.21
2,552 33.74 11.11 11.52 12.71 10.08
1,347 21.87 10.33 14.27 13.33 10.89
107 29.18 11.21 14.54 12.67 11.35
3,709 41.42 14.46 16.89 13.22 11.28*
1,261 36.5 13.98 15.9 13.81 12.05*
293 31.36 13.19 11.67 11.85 10.38*
11.04 11.44 9.44
12.3 11.48 9.9
2820.50
3484.17
21,405 311.34 101.43 7.22 7.87 8.73*
5,415 26.04 10.19 6.58 6.96 7.8*
16,963 2242.55 1011.77 6.58 7.11 8.04*
14,082 2664.86 1004.57 6.68 6.76 7.31*
36,839 260.64 108.99 6.61 6.68 7.32
33,799 240.25 100.09 6.64 6.72 7.29*
6.45 6.76 7.432685.89
* *Returns are compounded annualized as Mar 31, 2017. NAV for these schemes is of Monthly Dividend option and
rest are for annual dividend option.# Monthly Corpus as on Feb 28, 2017
Kotak Floater-ST
Birla SL Cash Plus
ICICI Pru Liquid Plan
HDFC MIP-LTP
ICICI Pru MIP 25
Birla SL MIP II-Savings 5
March, 2017 7
15,520 193.1 26.39 24.21 18.07 18.28
8,173 408.75 39.81 19.16 15.85 13.82
13,640 401.86 50.01 29.87 16.00 14.7
17,381 543.76 51.05 30.38 17.20 15.61
5,436 22.77 22.77 37.53 - -
8,467 28.74 21.88 29.98 23.73 20.68
14,755 49.8 30.53 36.9 29.52 24.82
4,860 51.66 27.84 34.51 33.1 30.29
3,297 42.55 27.79 42.69 34.81 29.53
532 31.51 15.57 34.26 22.29 16.64
1,050 137.75 102.87 3.28 19.88 23.58
11,491 34.53 20.2 18.42 21.83 22.27
297 14.78 14.28 39.77 - -
6,916 54.88 21.74 27.71 24.18 20.61
4,717 47.56 16.99 20.29 18.64 16.6
9,509 131.07 29.32 23.19 20.35 17.44
7,413 114.26 24.69 27.72 19.76 18.45
18.94 10.76 11.53
17.22 9.52 11.13
9174.00
29620.00
*Returns are compounded annualized as on March 31, 2017
