Mutual funds are an easy way to gain insight into the passive versus active investing landscape because there is a lot of historical data on mutual funds to review on some of the free portals in India. Based on equity mutual fund assets under management, a significant majority of investor rupees still reside in actively managed funds, but the trend is moving in favour of passive funds.
This consistent trend out of active funds and into passive index funds and ETFs makes some sense because advocates of passive investing build a strong case for this passive investment fund strategy.
Besides this some other trends have led to the growing popularity of passive investing, particularly in the last few years, since the global financial crisis and the start of quantitative easing (QE), stocks, funds and sectors have become highly correlated. In such an environment, differences in the quality of earnings between companies are sometimes ignored by fund investors, while default risks for bond investors become much less important. This has made outperformance challenging for active managers and has undoubtedly favoured passive investors. Passive index funds and ETFs also cost considerably less than their actively managed counterparts.
Passive index funds also implement a very consistent fund investment strategy, i.e. indices are built using a pre-defined rules-based approach, and the rules do not change much with time, if at all, over time. This is not to say that the investment strategy employed by most passive managers is a great one, because it is not, but rather that dependability of strategy is very important to long term mutual fund investing success.
This current market environment has been a complicated environment for active managers to navigate, but a largely rewarding time for passive investors who have seen their investments’ value rise with the markets. So what happens when this market changes?
Active managed funds function best in a market environment considered as tremendously volatile and complex, hence active investment management still remains very relevant. Skilled managers will be able to navigate the uncertainty, draw downs & demonstrate their value by developing proprietary insights. These investment fund managers committed to broadening and deepening their sources of alpha and developing next-generation fund investment solutions are positioned to thrive.
As markets evolve, so do hybrid strategies, hence there is space for both active, passive approaches in a well diversified portfolio and a combination of both will function well in different market conditions. More importantly is whether you as a mutual fund investor obtain the outcomes that you expect, at a cost that you are comfortable with.
The information, analysis and opinions expressed herein are for education purposes only and are not intended to provide specific advice or recommendations. This material is not an offer, solicitation or recommendation to purchase any financial products or services. Always remember that all investments carry some level of risk, including the potential loss of principal invested.