Are index funds better compared to actively managed mutual funds?

Kailas
Jul 18, 2019
I am thinking of shifting my portfolio from large cap funds to index funds. I think they will give me similar returns with lower costs.
1 Answer
Jul 27, 2019

This is one topic which has been discussed quite often off-late. The difference that a mutual fund generates over the benchmark index is termed as Alpha.

In the United States, approximately 90 percent of the fund managers have lagged behind the S&P500. This is a staggering number.

In India, as per a piece of research by Value Research, 67% of schemes have outperformed the Sensex during its journey from 20000 to 40000. Now, this figure compares quite well compared to the USA figure.

The opportunities to generate alpha decline in an economy as the economy moves towards being a developed economy. My belief is, in India, there will be alpha generation opportunities over the next 10 years at least. However, a lot will depend on how these funds are selected. Selecting the right mutual funds is important and I suggest you take help of a qualified financial advisor.

To answer your question specifically, I would suggest to park a certain percentage of your money in index funds. Every year, keep on increasing the allocation to index funds and reduce the allocation to actively managed mutual funds. The assumption we are making here is as time passes, the probability of mutual funds outperforming index funds will decline. All the best!

Here's a sample plan:

Year 1: 30% Index Funds; 70% Mutual Funds

Year 2: 35% Index Funds; 65% Mutual Funds

year 3: 40% Index Funds; 60% Mutual Funds

....


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