Active versus passive funds: Here’s all you need to know

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The evergreen active versus passive debate is gaining steam. A lot of fund houses have launched index funds and exchange-traded funds (ETFs) in 2021 in largecap, midcap, smallcap and in the sectoral category.

Data from Morningstar shows as many as 10 index funds and 10 ETFs have been launched this year. The figure was five and 10, respectively in the whole 2020. By comparison 43 active funds have been launched in 2021 compared to 54 in 2020.

Expert view

“Earlier we only had Nifty and Sensex index funds, but now AMCs are looking at having an entire bouquet of index funds. We are seeing index fund and ETF launches in mid-and-smallcap, international and even in fixed income category. AMCs are being future ready. The global trend shows that low-cost passive funds have a space. They are gearing towards it. But inflows are still not substantial. They are putting these products on shelf so that they have a track record,” says Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India.

Some of the index funds launched in 2021 include Kotak Nifty 50 Index Fund, Kotak Nifty Next 50 Index Fund, Aditya BSL Nifty 50 EW Index Fund, SBI Nifty Next 50 Index Fund, Aditya BSL Nifty MdCp 150 Index Fund, Aditya BSL Nifty SmCp 50 Index Fund, Nippon India Nifty 50 Value 20 Index Fund and Nippon India Nifty Midcap 150 Index Fund.

Sectorally, six ETFs were launched in 2021 compared to seven launched in entire 2020. The ones launched this year include ICICI Pru Healthcare ETF, Axis Healthcare ETF, Axis Technology ETF and Kotak IT ETF, etc.

Axis AAA Bond Plus SDL ETF 2026 Maturity, Nippon India ETF 5 Year Gilt, and Nippon India ETF Nifty SDL – 2026 Mat and Edelweiss NIFTY PSU Bond Plus SDL Index Fund – 2026 index fund are the ones launched in the fixed income category this year.

Mirae Asset NYSE FANG+ETF was launched in the global fund category.

Choosing between active and passive

Belapurkar says active and passive funds should co-exist in one’s portfolio.

“If you are a first-time investor and you do not have a guidance on selecting funds, you may start with index funds. But, if you do have advisors you may pick active funds at least in the specialised categories. Your core portfolio should comprise the passive funds, while the rest may go into active funds,” he says.

Industry players believe while generating alpha has become difficult in the largecap category, active funds do make sense in the mid-and-smallcap categories.

The SPIVA (S&P Indices Versus Active) Scorecard shows 53.06% of mid- and small-cap funds outperformed the benchmark S&P BSE 400 Mid-SmallCap Index in the last six months of 2020. The category fared the best, with the majority of them managing to beat the S&P BSE 400 Mid-SmallCap Index over the 10-year period to December 2020.