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“We should not ask ‘active or passive' but we should seek ‘active and passive'”

Wealth Insight

January 2022

With passive funds gaining in popularity, many investors wonder about their role in a portfolio and how much one should invest in them. Many others want to know if active funds, especially the large-cap ones, are still relevant. We speak with Swarup Mohanty to find out the answers to these questions.

- Swarup Mohanty

“We should not ask ‘active or passive' but we should seek ‘active and passive'”

What are your views on the raging active-vs-passive debate? Do you think that active funds, especially the large-cap ones, still have an investment case?

We believe it is time for passives to start forming part of the investor portfolio in India, but it’s not about either active or passive exposure; we think both active and passive need to be part of investors’ portfolios. An investor should continue to invest in an active fund with a good track record as well as take market exposure using ETFs to reduce the active risk and reduce the cost of his overall portfolio. We should not ask ‘active or passive’ but we should seek ‘active and passive’.

It is increasingly becoming difficult for large-cap fund managers to outperform the market indices like Nifty 50 on a consistent basis in recent times. We need to understand that it is the case with any major market and not specific to India. Over a period, as the market evolves and becomes efficient, the avenues for alpha shrink. However, we believe well-managed large-cap funds will continue to do well and there would be funds which would still make a good case for the core portfolio.

An investor needs to create a blended portfolio with active funds which they believe can beat the benchmark, along with low-cost market cap ETFs (so investors don’t run the risk of underperforming the benchmark significantly). At the end of the day, the goal of an investment is to create sustainable wealth with a combination of actively managed funds and ETFs.

What is the role of active and passive funds in one’s portfolio? Are there any benefits of having a mix of active and passive funds in one’s portfolio?