Investments in financial assets in India, especially in the last18 months have gained traction. One of the reasons is the lack of returns in the real estate asset class and lower interest rates in fixed income class. And with now more attention paid to financial assets, should an investor adopt an active strategy or a passive strategy?
This can be considered in two different segments. One—active fund management vis-a-vis passive fund management. Two—active portfolio management vis-a-vis buy and hold, i.e., a more passive strategy.
Active fund management
Active fund management is a process where in the fund manager actively manages the fund to generate returns in excess of the underlying benchmark indices. In this case, the fund management team tracks various sectors of the economy, undertakes technical calls based on price action and also takes tactical investment calls based on the sector and company analysis. For instance, the fund manager of a large cap fund tracking the top 100 shares of the benchmark indices would typically want to generate returns beating the indices and enable the investor to grow his wealth. For this higher returns, the active fund manager is rewarded with increased Assets under Management (AUM) by the investor. It is the alpha increased return generated by the fund manager which drives the investment.
Passive fund management
A passive fund management strategy is wherein the fund house does not try to beat the returns of the benchmark indicies. It more or less looks to replicate the returns of the tracking indicies. For instance, the investment objective of Reliance ETF Nifty BeES is to generate returns that would mimick or correspond to the total returns of the Nifty 50 Index.
The difference in returns in this ETF and the Nifty would be on account of the expenses and the cash held in the ETF. So an ETF which is a passive way of investing would have returns in line or below the benchmark indicies. No alpha is generated and an investor can be assured of the returns in sync of the indices, in the ETF. This style of investing is more prevalent in matured financial markets of US and Europe. To encourage the equity culture, the government of India has also come out with a CPSE ETF, comprising of 10 PSUs and managed by a leading AMC.
Active portfolio management
Active portfolio management will mean that an investor actively tracks the markets, identifies the stocks and sectors and basis the price action and the fundamentals, times his buy and sell. This would mean that during the investment period, the investor is looking to generate alpha returns.
In a more passive strategy, more popularly known as buy-and–hold, the investor buys the identified shares of the company, taking into account the fundamentals and opportunity of growth visible over multiple time periods. Returns are generated through dividends and capital appreciation spread over the investing period. Here, an investor has to be careful and monitor the performance at regular intervals of 3-6 months to check the reasons for staying invested still holds true.
Today, majority of the investors carry out investments with a goal and then identify the options. For an investment horizon in excess of 3-5 years, we have investors who invest in a disciplined manner in identified mutual fund schemes through Systematic Investment Plan( SIP). This is a time tested approach, which has been successful.
The writer is partner, BellWether Advisors LLP