Which is Better - Index Funds VS Actively Managed Funds | History, Advantages, Performance and Risk
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- Опубліковано 14 лип 2024
- The battle between actively managed and index funds is now 50 years in the making. Are Index funds better than actively managed funds?
In this video, ETMONEY’s Shankar Nath dives into this debate of active versus passive investing with some history, data, analysis, and a little bit of opinion.
Topics Covered in the video:
00:00 INTRODUCTION
00:48 HISTORY OF INDEX FUNDS
04:12 WHAT ARE INDEX FUNDS?
08:35 ACTIVELY MANAGED MUTUAL FUNDS VS PASSIVELY MANAGED INDEX FUNDS
15:20 ETMONEY OPINION
Resources:
Asset allocation Video - • How to do Asset Alloca...
Should you chase top-performing funds - • Investing in Best Mutu...
ETMONEY Blog - www.etmoney.com/blog
👉 WHAT ARE INDEX FUNDS?
An index represents the value of a particular group of investments.
Eg: The Sensex is an index that tracks the performance of 30 of the largest and most actively traded stocks on the Bombay Stock Exchange.
Likewise, the Nifty50 Index represents the weighted average of 50 such companies on the National Stock Exchange
An index is nothing but a generic term that describes a list of securities that are selected and weighted according to a set of rules
An index fund is simply a fund that tracks a market index. In other words, the index fund simply buys up all the shares that make up a particular index per the weightages and methodology prescribed. The index fund owns all the shares that make up the market one would end up earning the average returns of all stocks in that market
Advantages
Index funds offer a much broader diversification than what any actively managed mutual fund can offer
Minimum Fund management expenses
The index fund achieves this by ---
a) not having to pay any advisory fees or salary to a research team ..
b) by savings on account of low portfolio turnover which reduces trading fees and taxes
Index funds serve as one of the finest vehicles that support asset allocation.
👉 ACTIVELY MANAGED MUTUAL FUNDS VS PASSIVELY MANAGED INDEX FUNDS
Ever since index funds were introduced in the 1970s, there has been a battle going on between actively managed funds and passively managed index funds.
In this section, we examined this tussle from three perspectives -
The moral justification
The performance angle
The risk explanation
👉 The Moral Justification
- actively managed funds are of the opinion that markets are often mispriced and the fund manager is in the best position to exploit this opportunity and make a lot of money for the investor
- The index manager’s view is that the current price at which any stock is quoted has already been taken into all known and available information.In other words, this is the price that has been agreed to by a willing buyer and willing seller in the open market and hence it is impossible to capture excess returns without taking additional risk
👉 The performance angle
We looked at all available actively managed large-cap funds and all available large-cap index funds to draw a comparison.
In a universe of 44 large-cap funds, there were 29 actively managed funds and 13 large-cap index funds. In the more recent years, especially since 2018 onwards we see that the index funds have performed a bit better than the average mutual fund. There is not much difference in performance between an average actively managed mutual fund and an index fund
We looked at how many of the many active funds have underperformed when compared to the typical Nifty 50 index fund.
If we give more weightage to the recent years i.e. 2018 onwards, we see that half or slightly more than 50% of the actively managed large-cap funds have struggled to keep up with a Nifty 50 index fund. The average the last 4 years of data, we see that 61% of the active funds unperformed.
The global data on active vs passive funds shows that a win-loss ratio of about 1:2 .. i.e. about 66% of actively managed funds underperforms the index funds.
In India, this ratio seems to be more of 1:1 if we take the last three years of data .. but it does come very close to the 1:2 ratio if we take the last four years of data.
👉 The risk angle.
From a risk perspective if not tracked, investing in actively managed funds can create high uncompensated risk in a portfolio.
👉 ETMONEY OPINION
This battle between actively managed and index funds is now 50 years in the making and if data were to be believed index funds seem to be winning.
Globally index funds have captured a larger share of the wallet as compared to active funds .. and there is a growing case for that happening in India too over the next decade
#ETMONEY #indexfunds #MutualFunds #Activelymanagedfunds
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After I die, put all my money in Vanguard S&P 500 index fund. John Bogle has done more for individual investors than any other person in history.
- Warren Buffett.
The answer is 'Index fund'😂. I saved your 17 minutes enjoy!
In case of Large cap (1-100 ) Nifty companies , Index funds like Sensex 30 or Nifty 50 make sense because there is not much to choose by the active fund manager and out performance ( high alpha) is obviously difficult. Low ER is the second advantage
But in Midcap and Small cap funds the active funds seem much better choice now . This is because there are more companies in their scope and the fund manager has a large role to play to generate high alpha in active funds of these categories .
Conclusion: Preferred Equity Strategy for next 1-2 yrs
Large caps- Index Funds
Mid/Small caps: Active funds direct mode after good research
Wonderful summary.
I came to save conclusion after watching many videos
Wonderful
Even I am an passive fund investor
But this has convinced me to be index fund investor for very long time.
Well, the videos are phenomenally great!! Covers an in-depth view of the topic + the presentation.. everything is just great
Thank you, Shankar. The variations in performance among the active funds are much much broader than the index funds (CV is very tight) . Hence, it will make sense to compare top 25 percentiles of active funds vs that of passive funds over a given period.
you can watch this video where should you invest in index funds or in Active funds:
ua-cam.com/video/XF86BRuN1aQ/v-deo.html
ETmoney is educating with data and trying to explain in choosing investment instrument in a simple and effective manner.. Thanks...
you can watch this video where should you invest in index funds or in Active funds:
ua-cam.com/video/XF86BRuN1aQ/v-deo.html
Thanks Shankar for your presentation. The best host without any frills and to the point. You are perfect. Don’t change a thing. We want facts and not entertainment.
Thanks for the appreciation
You are welcome.
Your videos are to the point and utterly honest Shankar sir. Thank you and your team for these insightful videos. 🙏
Thanks @Shankar and @ET Money for another great video!
Beautifully explained...I have a question: In Index fund (eg. NIFTY 50), Why there are differences in return % among various AMC's like ICICI NIFTY 50 Index plan, SBI NIFTY 50 Index plan etc...Why each of their NIFTY 50 plan give different returns?
Thanks. It's because of the tracking error. We have a video on this. Pls check out ua-cam.com/video/pzrGxQD_Y1Y/v-deo.html
@@ETMONEY Thank you 👍
Due to tracking error in small decimal percentage points which adds up in cumulative way (over a period of time) thus affecting the final return values between different nifty 50 funds.
If you have large cap fund in your account can you also add index fund?
Will it be beneficial
From 2018 sebi made a regulation on comparison of active funds with index TRI which was earlier with index with out dividends that might also kind of helped a bit for index funds to perform better and it's an apt comparison since most index funds are with growth option and tracks TRI of an index
Excellent explanation. Eagerly waiting for next part. I am considering NV20 Vs Large Cap and Aplha50 Vs Flexi Cap for my SIPs.
Informative videos as always..great work👍👍
Was eagerly waiting for this video. Can't wait for the next one. I need to cement my understanding of Index funds before I start investing.
Great video, but you didn't elaborate on the difference in costs and how it can add up over a long investing horizon. Please cover this in your next video.
Thanks for this brilliant analysis.
The best of all the Finance Channels❤️
Eagerly waiting for the next video on this topic
Very useful data explained in an impartial manner.
What a video! outstanding information
Excellent content as always. Highly appreciate the efforts you guys put in.
you can watch this video where should you invest in index funds or in Active funds:
ua-cam.com/video/XF86BRuN1aQ/v-deo.html
Thanks again for the valuable content.
@Etmoney Can you make a video on differences between ETF and Index Funds ? Which one is better ?
I have the same question. @ETMoney
In mutual-fund you get end of day nav
In etf you can place Market time order
So you can get at a time nav
Etf if exchange tradable fund
Where mutual fund is not exchange tradable
If you are a active investor then etf is better
If you are not an active investor than mutual fund is better
For ex.
In this week Monday Bank nifty made low of 30560 at around 2 pm
But end of the day closing was 30800
In etf if you are active in the market then you can place order of index etf at 30560
But in mutual fund you do lupsum on same day you get nav of closing price 30800
@@nipulrock thank you 🙏🏻
@@swarnamohanty3121 yes we need demat account for etf
Awaiting your next video on Index funds. Please release it soon
Great one guys😍, I also believe that passive and index funds are better in the long term since atleast there won't be any deficit returns as compared to benchmark...One area where I couldn't find any passive funds was the ELSS category, infact I started my investing journey with these funds, Actually you guys should give feedback to the mutual fund houses to come up with passive funds in the ELSS category.
you can watch this video where should you invest in index funds or in Active funds:
ua-cam.com/video/XF86BRuN1aQ/v-deo.html
I think reason is active funds have more expense ratio and therefore more profits
Zerodha has one passive ELSS fund now
@@Sara.apr24 but alas I am in the new tax regime now , so no need for ELSS funds anymore, simple index funds without a lock in are good enough..but thanks for sharing 🙏
Great analysis ❤️
Great content as usual.. Keep it up.. ♥️💯
Great explanation and Quite helpful. Keep the good work going like this. Thanks!
Glad it was helpful! Thx
Absolutely brilliant
Watch from @8:36 if you know the basics on active vs. Passive funds
Honest video, very informative and intellectual
Keep up the good work
all of your videos are great
Thanks for explaining clearly about index funds
Most welcome
It's really wonderful to see video s like this which r eye-opener
Thank u shankar bro
Most welcome :)
🔥🔥🔥 Simply awesome
Thank you!
this video is epitome of perfection .... great job ET money guys...!!!
Thanks
thank u i learned so much stuff with absolutely no clutter.
You are so welcome!
Very well explained.
Please make video on midcap and small cap funds as well. Would love to have thoughts on the same
Kindly make a video on ETF especially Motilal Oswal nasdaq 100 ..superb content..a big thumbs up 👍 from my side
Thank you for excellent video.
Please compare top 3 NIFTY 50 index funds
Good go on...with rich content
Good one...but UTI ,HDFC AMC's has raised expense ratios on index funds to 0.75% . Its not good for the investors in those...
In uti it is 0.2
Very nice explanation.
Thank you, very informative.
You are welcome!
Excellent 👍 Pls share some good Index funds list...
AMC are discouraging passive investing by increasing total expenses ratio...
Best example is HDFC AMC and UTI AMC
you can watch this video where should you invest in index funds or in Active funds:
ua-cam.com/video/XF86BRuN1aQ/v-deo.html
@@akashroy4467 Video is private
Passive investing seems to be the future in large cap as shown by you as well with data. But what about mid-caps and small caps?? Also, What about funds like parag parikh flexi cap fund which takes into consideration the large cap index stocks from other countries as well?? Could you please make video on these 2 questions of mine. Thank you😊
That's a well rounded nice question
That's a best combination with index large caps and mid and small cap active where it takes actual work for fund manager to handle
Hello ETMONEY Team
Could you please one video regarding passive fund asset allocation and this video very wonderful 👍
This is true for large cap funds. However we can still choose Large Cap 5 star funds based on past track record eg ICICI Bluechip has performed better than 100 TRI benchmark throughout net of expenses
very informative and useful. thanks shankarji
Most welcome
Nicely explained in a simple way
Thank you so much 🙂
Good information and excellent presentation
Thanks a lot
Just Fantastic👌
Thanks a lot 😊
Hello can you please analyse which is a better product between index funds and nifty bees
@ETMoney - is it a good strategy to maintain Index funds as a replacement of Large Cap active funds and mix with other active fund segments?
It's actually eye opener
Thanks!
Informative as always
Thanks again!
You are THE besst 👍
excellent research , data is everything , instead of showing narendra modi promotions , you should publish such excellent data based research videos ! thanks
Can you please clarify for actively managed funds, the data relates to regular or direct plan?
Man, great advice, at the right time
Thanks
@shankarnath what is the correlation btwn Indian and us stock market? Shld we give 5-10% exposure to us stocks? Or can we earn here better? What is the better prospects as far as rolling returns r concerned?
Tq..Is there elss index fund, pls share..
You proved my decision of choosing Nifty 50 Index fund right❤️👍
I'm just confused.
Can we invest directly in nifty 50 or any of its companies?
@@mehulprakash4295 Are Nifty 50 itself is a bunch of 50 companies.
You can invest in Navi Index fund it's new and low Expense ratio.
@@rahulrawat8010 I want to hold for almost 20 years. So can I do that with the Navi index fund?
@@mehulprakash4295 I can't guarantee you 😀 but Index fund are for those who don't have much time to research.
I also use Nifty 50 index fund.
Navi is a new product can't say. But Index funds are good.
@@rahulrawat8010 that means we should always look for index funds of nifty 50, rather than normal mutual funds?
Plz make a video on how to analyse index funds
Sir, pls create something really required video like some good stokes have strong future...
Follow-up video on how to build a Passive investment plan?
Lovely video…. It would be lovely to have citation of the data
Thank you!
kindly make a video comparing DebitFund Options with Bank Fixed deposits over a 30 year period, all advantage and disandavtage
Sir can u please make a video on the Mirae Asset NFO NYSE FANG+
Very genuine video👍❤️🙏
Thanks a lot
Sir,, is there any mutual fund which invest in Index fund but gives tax saving benefits.. please guide
Super...thnx A ton
Welcome 😊
@@ETMONEY is there a video already on best index Etfs in india - fee wise , n closest mirror to the index
@ETMONEY, Please compare INDEX ETF and Index fund
Excellent video 👏. Do u have any previous video on hdfc index sensex plan. Just share it if video done already
Nifty 50 is more diversified.
While the data and the analysis are correct in the case of Large-Cap funds. The same doesn't apply to Mid-Cap and Small-Cap categories in India. In the end, it's all about the level of participation from the retail investors (the total number of brains in the market). I think as this participation grows in India, we'll also move towards passive investing. Till then, we can happily ride the active management wave (at least in the Mid and Small-cap categories).
Yes that will be best combination Passive Large cap and Active Mid/Small caps
@@anilkumarsharma8258 you are right and there are large and mid cap which are better than large cap
*Please show us how ull do the data analysis right from downloading data*
Can you provide a list of the index funds by rank?
Wonderful video!! Was the expense ratio considered for calculating the returns? If not then the actively managed funds will always comes out as a loser for the investor.
Yes, we did. Afterall it's index fund vs active fund .. not benchmark vs active fund. Thanks for the appreciation!
@@ETMONEY Thanks you for the clarification. Keep up the awesome work you guys are doing..
Pls make a video of index fund vs nifty/sensex ETFs. Which one should we prefer
+1
Indeed needed
+1
please make a video on nifty 50 index fund vs sensex 30 index fund
Check Excellent video by Freefincal on this topic
Sir please make a video on portfolio management services
How about keeping an active fund and an index fund in your portfolio..
Hi Shanker, Question: Does it make sense to have index funds as well as large cap blue chip funds in our portfolio? Both have almost similar holdings! Which one would turn out to be beneficial in the long run (10 years)? An early reply will be highly appreciated. Thank you.
Hi. It's impossible for anyone to predict whats going to happen over the next 10 years. The selection risk is 1:1 which means out of every 2 large cap funds - 1 will outperform the index while 1 will underperform it. So, it comes down to your comfort.
@@ETMONEY Thank you for the prompt reply. Well, I'm an absolute newbie in the investment space. Might i ask, can i keep "both" - UTI NIFTY 50 Index fund as well as Canara Robeco Blue chip fund in my portfolio? Or should one be just fine? Please help me clear this confusion. Thank you.
Dear ETmoney team, please make a comparison video of various NSE strategy based indices like nifty alpha 50, nifty momentum 200, nifty nv20 etc vs NSE broad indices like nifty 50, nifty next 50 etc
Thank you.
Video on etf vs index funds pls
One video for index fund portfolio for long term Investor thank you
sir please make video on nifty value 20 index
Sir make videos on how to buy and sell share..please🙏
We want that video sir on how to improve index fund return
Telegram : GrowwAdmin
5:20 your explained well about liquid fund inversment for 6 month period but some other category Vacation , marriage most importantly wealth and retirement investment not explain clearly plz explain that details also balanced means you mentioned balanced fund or balanced portfolio that not clear
same time am age 20's person
planning 25% fixed income 75% equity portfolio for retirement inside equity part 50% active and 50% passive in this part 53%large 22%mid and small remains fixed income catigery 12% ppf 8% banking psu 5% for liquid cash
this plan is good or not give me suggestion. your videos very good
Etmoney channel is one of the best for financial education. But the Etmoney app now days need additional step for contribution besides easypay activation. Also, the feedback section of Etmoney app doesn't get response despite numerous suggestions or queries. Sir, please look into the matter as the contribution or purchase is becoming more tedious and complex which it wasn't before.it also not able to get same day NAV.
Here Etmoney have put a lot of pressure to people to go and buy index fund but data and logic was true.
Prior to SEBI guidelines the so called active Large cap MF were not Lage cap in true sense and hence they were able to beat the benchmark.
Sir which is good index fund for log term nifty50, next 50, nifty 100, midcap 150, smallcap 250, nifty 500
Is it good to buy Nifty bees, and after buying can we sell anytime through zerodha?
You can buy Nifty bees there are many bees option like Nippon nifty. Bees are etf so you can trade like buying and selling. So you can sell or buy them just like stocks. Value of nifty bees is determined by the nifty index. And price of nifty etf will be roundly 1/100th of nifty index.