Capital Markets: Challenges and Developments

What are Active and Passive Equity Funds?


From UPSC perspective, the following things are important :

Prelims level : Active and Passive Equity Funds

Mains level : NA

Central Idea

  • Mutual fund investors are currently favouring active equity funds over passive funds, according to a recent study.

Active vs. Passive Equity Funds

Active Equity Funds

Passive Equity Funds

(Index Funds/ETFs)

Investment Strategy Actively managed by fund managers Passively track a specific benchmark index
Research and Analysis In-depth research and analysis to select individual stocks No active stock selection or market timing; follow benchmark index composition
Portfolio Turnover Higher turnover; frequent buying and selling of stocks Lower turnover; minimal changes to match index composition
Fees and Expenses Higher management fees and expense ratios Lower management fees and expense ratios
Performance Performance varies widely; aims to outperform the benchmark Seeks to match benchmark index performance
Diversification Diversification depends on the fund’s holdings and strategy Offers broad diversification based on benchmark index
Tax Implications Potential capital gains tax from frequent trading Generally lower capital gains tax due to lower turnover
Suitability Suited for investors seeking potential alpha (outperformance) Suited for cost-conscious investors seeking index-like returns
Active Management Risk Subject to fund manager’s stock-picking skills and market timing Minimal active management risk; returns closely track the index
Investor Involvement Less hands-on; rely on fund manager’s decisions Passive investing; no need for frequent monitoring
Examples Mutual funds with active management Index mutual funds, Exchange-Traded Funds (ETFs)
Common Benchmarks in India Sensex, Nifty 50, BSE 100, etc. Sensex, Nifty 50, Nifty Next 50, etc.

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