Mutual Funds
Index Funds vs Active Funds: Which Is Better in India?
By Vikas GuptaPublished Updated
Quick answer
Index funds copy a market index at low cost, while active funds pay managers to try to beat it. Index funds offer simplicity and low fees, and active funds offer a chance of outperformance with no guarantee. Many investors use index funds as a core and add active funds selectively.
This debate is often presented as a battle, but most investors do not have to pick one side.
“Don’t look for the needle in the haystack. Just buy the haystack!”John C. Bogle, The Little Book of Common Sense Investing
How do index and active funds compare?
| Index funds | Active funds | |
|---|---|---|
| Goal | Match the index, less costs | Beat the benchmark |
| Cost | Usually low | Usually higher |
| Manager risk | Very low | Depends on manager and process |
| Decisions needed | Which index | Which fund, and when to replace it |
| Possible outcome | Close to market return | Above or below the market |
Which has done better in India?
S&P’s SPIVA India reports have repeatedly found that most active large-cap funds trailed their benchmark over long periods. The results have tended to be less one-sided in mid and small caps, where markets are less heavily researched. These results change over time and do not predict the future.
What should I check in an index fund?
- The index: Nifty 50 and Sensex hold the largest companies, while broader indices add mid and small caps.
- Tracking error: how closely the fund follows its index. Lower is better.
- Expense ratio: two funds on the same index should differ mainly by cost.
How might I use both?
A simple approach is an index fund for large caps, where active funds have found it hardest to beat the market, and active funds where you believe a manager can add value. Keep the total number of funds small. See how to choose funds and how to diversify.
Remember that index funds still fall when markets fall. They remove the risk of poor manager choices rather than market risk.
Frequently asked questions
Are index funds good for beginners?
They are a simple starting point because they are low-cost, diversified and need few decisions. They still carry full market risk, so a long horizon remains important.
Is an index fund better than an ETF?
They are similar. An index fund allows SIPs without a demat account, whereas an ETF trades on an exchange and needs a demat account. Many SIP investors find index funds simpler.
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Mutual fund investments are subject to market risks, read all scheme related documents carefully. Mutual fund distribution by Korlipara Vikas Gupta, AMFI-registered Mutual Fund Distributor, ARN-178652. Distributors earn commission from fund houses on regular plans. Content and calculators on this site are for education, not personalised investment advice. Illustrations use assumed returns, which are not guaranteed.