Financial Risk Management

Performance of Active and Passive Mutual Fund Schemes in India

Article Details

Pub. Date	: Sep, 2022
Product Name	: The IUP Journal of Financial Risk Management
Product Type	: Article
Product Code	: IJFRM030922
Author Name	: Shreyash Sabare, Abhishek Mishra, Nimmagadda Dheeraj, Nikesh Sanjaykumar and Pradiptarathi Panda
Availability	: YES
Subject/Domain	: Finance Management
Download Format	: PDF Format
No. of Pages	: 10

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Abstract

The Indian mutual fund industry has been growing at an unprecedented rate, and there are more than 2,000 schemes on offer today. There is a preconceived notion among Indian investors that passive funds that cover the index companies in their portfolio are better than active funds. This research aims at providing effective insights for investors to make better decisions before entering the world of mutual funds. Primarily, active and passive schemes are compared on five popular criteria, namely, tracking error, standard deviation, Sharpe ratio, Treynor ratio and Compound Annual Growth Rate (CAGR). The analysis has been done for a period of 15 years, further subdivided into smaller intervals. It is concluded that active mutual fund schemes outperform passive ones by a considerable margin in the long run. In the short run of three to five years, passive funds are slightly better. Investors who are risk-averse should analyze not only the risks but also various other parameters, as those used here, for a better understanding of schemes.

Introduction

A mutual fund is a type of collective investment vehicle that collects and pools the money from several investors before investing it in various financial assets such as stocks, bonds, government securities, and money market instruments. Investing in a mutual fund is like hiring a driver for your vehicle who is experienced and knowledgeable. A stock index is a fictitious portfolio of stocks, represented by a list of company names and the total number of shares held in each of those companies. It is constructed using a predetermined set of standards. A genuine mutual fund is considered an index fund if it purchases equities and then keeps those stocks in a portfolio that is like the index. By providing diversity and cheap fees, index funds make it possible for typical investors to engage in the stock market in an informed