This July, 28 NFOs were launched, and more NFOs are expected to be launched this investing season. What should you choose, active funds or passive funds?

Active vs Passive Funds

A total of 18 AMCs launched 28 NFOs in July. The recovery in the markets means that the investing season is about to begin. Many mutual fund schemes are expected to be launched soon. In July, out of the 28 NFOs, most were passive funds. These schemes are either ETFs or index funds. Passive fund NFOs launched in July are ICICI Prudential Nifty IT Index Fund, HDFC Nifty 100 ETF, Aditya Birla Sun Life Nifty 200 Quality 30 ETF, Quantum Nifty 50 ETF Fund and IDFC Midcap fund.

While many passive funds were launched in July, some active funds were launched as well. Active funds actively trade in the markets to make use of discrepancies in the markets to generate superior returns. On the other hand, passive funds have a fixed exposure to either the index or a particular underlying, and the fund is passively invested in that underlying. In India, there is evidence that half of the active fund managers have been able to outperform the index, unlike in Western countries, where the passive funds perform better.

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Active Funds Vs Passive Funds

There is no correct choice between active and passive funds. It depends on your risk appetite, return expectations, time of investment, etc. Passive funds work with low returns with very little risk. If you want to invest for the long term, passive funds might be a good choice. But if you are looking to invest for the short term and you believe that the fund manager will beat the index, you should go for active funds.

A good strategy might be to follow the core-satellite strategy. In this strategy, 70% of the portfolio is invested in core funds, i.e. stable funds like passive funds. Also, 30% of the portfolio is invested in riskier funds or satellite funds like active funds. Thus, by investing 70% in passive funds and 30% in active funds, you diversify the risk.

Related: Different types of mutual funds

Final Verdict

The final verdict is that for general investors, a core-satellite strategy, i.e. 70%/30%, might be a good strategy. If you want to invest in new funds, many new funds are expected to be launched this season, and if the markets remain strong, NFOs will be launched this year. Also, make sure that you invest in good, actively managed funds by checking the track record of the fund manager, as your portfolio will be affected by his/her decisions.

Related: Sectoral funds Vs Thematic funds: Which one should an investor choose?

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Disclaimer : This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.