Investing for various individuals in India is a complex process that involves a lot of risk. Therefore, instead of investing in direct stocks, individuals opt for mutual funds that help with fund diversification. Mutual funds serve as a pool of various large-cap, Mid-cap, and small-cap stocks which are managed by fund managers of investment companies and banks.
Mutual fund investment offers various benefits like SIP investment which makes the investment process easier and hassle-free. One can even opt for a SIP investment calculator to ascertain the overall risk and return of a particular mutual fund. Mutual Funds are divided into two broad categories:
Table of Contents
Index Funds
Index funds are the simplest form of mutual funds that mimic the performance of the overall market index like nifty 50 or Sensex. These are considered passive mutual funds which are generally risk-free and do not require active management by a mutual fund manager. Moreover, these are characterized by low cost, diversification, and simplicity making them perfect for beginner investors.
Regular/Actively Manage Funds
Regular/ Active mutual funds are those which are managed by mutual fund managers regularly. Such mutual funds involve investment in large-cap, blue-chip, MidCap, and even small-cap stocks. As compared to index funds, these actively managed funds are known for their high management cost, better returns, and flexibility.
Comparison Between Index Funds and Regular Managed funds
Cost
Index funds like SBI nifty 50 index fund or UTI nifty index fund are best known for their low expense ratio. The mutual fund managers of index funds do not charge high management fees as they do not indulge in regular research and trading. On the other hand, actively managed funds have a high expense ratio as compared to index points which can even reach 1.5% or more.
Performance
Actively managed mutual funds deliver better and more substantial returns as compared to index funds. Mutual funds like HDFC equity fund and ICICI Prudential blue-chip fund can deliver more than 30% return in a single year. On the other hand, index funds perform in line with the actual index like Sensex or Bank nifty. Due to low cost and risk, the returns are also less as compared to active management which generally outperforms the index funds.
Risk Factors
Index fund investments are safe as compared to active management. Due to low volatility and fluctuations, index funds can deliver returns between a range of 7 to 9% in a year. On the other hand, actively managed mutual funds face the volatility risk of the overall market, economy as well as individual companies. However, effective investment decision-making by mutual fund managers can lower the risk.
Investors with a risk appetite and who look for better returns should opt for SIP investment in actively managed funds like Mirae Asset large-cap fund. On the other hand, investment in the top index funds India can even help risk-averse investors to obtain better returns as compared to traditional fixed deposits. Investors can even opt for diversification through investment in both index and actively managed funds for a complete balance.
