Active vs Passive Funds | Which is Better?
In this video, we explain the difference between two types of mutual fund based on their management style i.e. Active and Passive funds.
Here is the summary of the video:
Imagine India is playing a T 20 cricket match against Australia. While batting in the second innings, India has got a target of 180 runs to chase. Now, if India plays normally without taking any risks, they might be able to score around 120–140 runs. But, they won’t win the match. To win the match, India will also have to hit some big shots during the innings. Hitting big shots involves taking calculated risks. Sometimes it will pay off and sometimes it won’t. If it pays off, India will win the match. So, to win the match, some risk will have to be taken which may or may not pay off. Going by the current form of Indian cricket team, more often than not it will pay off. This is the simple concept of risk and return. To get higher returns, you have to take some risk.
In the same way, actively managed funds strive to get higher returns than the average market (Sensex or Nifty). To achieve higher returns than the average market, funds managers have to take calculated risk. They have to pick up the stocks that are not being picked up by the index. They do so by analysing economy, industry and the company. They take calculated risks based on their analysis. If the economy, industry and company behaves as per their expectations, they make higher returns than the average market. Sometimes, their expectations might not come true which leads to returns below the market average. A good fund manager will give you higher returns than market average or the passively managed funds, more often than not (like current Indian cricket team).
Your statement - “actively managed good mutual funds sometimes give poorer return than passively managed funds” can not be generalized”. Not every fund behaves the same way just like every cricket team has a different caliber. If a particular fund that you are monitoring is performing below market average more often than not, then you can say that the fund manager is not doing a good job. But, if a particular fund is giving returns above the market average most of the times, then it will be fair to say that fund manager is doing a good job.
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