Comparing active, passive mutual funds

Jan 18 2013, 15:33 IST
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SummaryMutual fund is an investment by a collective group of individuals sharing a common financial goal like capital appreciation and dividend earnings.

BankBazaar.com CEO Adhil Shetty explains facts to be kept in mind before making an investment in mutual funds

Mutual fund is an investment by a collective group of individuals sharing a common financial goal like capital appreciation and dividend earnings. It offers a person benefits of investing in diverse portfolio in Indian and foreign stock markets and support of a good research team.

Active mutual funds

Such funds deliver the benefit of diversification and professional management with the help of skilled professionals and a fund manager chosen by the mutual fund house. While investing in it, one needs to be careful about its trait as high expense ratio incurred by the fund escalates the risk as well as cost for the investors. However, if the fund manager is involved in Ďaggressive portfolioí, the level of risk for the investor may aggravate.

Passive mutual funds

Such funds are aligned to specific benchmark indices such as BSE Sensex, BSE Bankex, S&P CNX Nifty and others. The motive of these funds is to showcase the performance of the benchmark indices by investing only in the stocks of the index with the corresponding allocation and respective weightage. These are considered as the main ingredient for retail investors, and hence, if one is not willing to take up very high risk, passive mutual funds are a safer bet.

Assessment parameters for making a decision

There are merits and demerits of both active mutual funds and passive mutual funds, and the debate, as to which one to opt for, is long persistent. The following points need to be assessed before taking a decision

* Age

* Income and expenditure

* Number of family members and composition

* Health condition

* Risk behaviour

* Investment objective

Other avenues

The investments in mutual funds are subject to market risk. They have an element of uncertainty embedded in them. For risk lovers, mutual funds are a feasible and good option, but for those who like to play safe, mutual funds are not the best choice. There are other risk-free investments channels listed below which can be opted for.

Sebiís new guidelines

On October 31, 2012, Sebi considered new registration for six companies while another six are awaiting confirmation.

Sebi also mentioned that mutual funds can charge a 30-basis point expense in smaller cities and not in metros.

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