The battle between actively managed mutual funds and index funds is now half a century old. And if we believe the data, index funds seem to be winning.
Globally, index funds are more popular as compared to active funds. There is a growing case that it will happen here in India too.
There are a few differences between the index and active mutual funds, but the biggest difference is that an index fund invests in the stocks in the same proportion as the index (Sensex or Nifty), while in active mutual funds, the fund manager has the discretion to buy and sell stocks to maximize returns. So, index funds seek market-average returns, while active mutual funds try to beat the market. Discretion is good but it is hard to know whether discretion will work or not work.
So, please let us know given a choice to have only one of them in your portfolio, what type of funds would you prefer and why?
- Index funds
- Active mutual funds