Can Active Funds Still Generate Alpha?

There has always been a tug of war between active and passive investors. There are dozens of studies carried out around the world that say that it is very difficult for an active fund manager to beat the index consistently. So, does this in any way mean that you should scrap the idea of investing in an actively managed fund? The report provides insights into this issue

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Due to the low-cost structure of the passive funds, passive investing has gained huge popularity in developed markets such as that of the US. The global assets in passive products passed USD 5 trillion, with over 7,000 passive products as of March 2020. The US has a market share of 68 per cent with USD 3.6 trillion in assets and over 2,000 products. This is followed by Europe and Japan with 16 per cent and 6.5 per cent of market share, respectively. Though the numbers are far more modest for India, the growth has been encouraging.

The total assets under management (AUM) in passive products stood at USD 24 billion with 86 passive products. Compare this with the scenario of five years ago when in India the AUM was a mere USD 2 billion with 57 products. And a decade back it was far less with USD 1 billion in assets and 26 products in the market. In that sense, the progress made by India is remarkable, especially in the faster-paced active investing market. Two years ago, the exchange-traded fund (ETF) market constituted 2.2 per cent of the mutual fund industry while in December 2019 it stood at 7.5 per cent. In India, institutional investors and individual investors contribute nearly 92 per cent and 8 per cent of the assets, respectively, in passive products. Passive investing is an investment strategy that is said to maximise returns by minimising trading and investment costs. Index investing is the most common form of passive investing, whereby investors invest in funds that replicate broad market indices.