The Great Investment Debate
Insights The Great Investment Debate Passive vs. Active – Which Path is Right for You? Date: May 2025 In the realm of investing, a fundamental choice often confronts both novice and seasoned participants: should you opt for a passive approach or an active one? Both strategies have their merits, proponents, and drawbacks, making the decision a crucial one that can significantly impact your long-term financial outcomes. At their heart, passive and active investing represent contrasting philosophies regarding market efficiency and the ability to outperform. Let’s delve into the core differences and help you navigate this pivotal investment decision. Passive Investing: Embracing the Market’s Wisdom Passive investing operates on the belief that the market, as a whole, is largely efficient. This means that current stock prices already reflect all available information, making it exceedingly difficult to consistently “beat the market.” Therefore, the goal of a passive investor is not to outperform but rather to match the market’s returns. This is typically achieved by investing in broad market index funds or Exchange Traded Funds (ETFs) that track a specific benchmark, such as the S&P 500 or the NIFTY 50. Passive investing has gained significant traction over the years due to its low costs, reduced emotional decision-making, simplicity and efficiency.Active Investing: The Pursuit of Outperformance Active investing, on the other hand, involves a more hands-on approach with the aim of outperforming the market’s average returns. Active fund managers employ various strategies, including in-depth research, market analysis, and stock selection, to identify undervalued securities or capitalize on market inefficiencies. Despite the compelling arguments for passive investing, active management still holds appeal for many due to its potential to outperform the market, downside protection in a falling market and pursuit of ‘active’ returns which can significantly enhance portfolio performance. To understand this better, we analysed rolling returns of actively managed mutual funds across 3 main categories based on market cap – Large, Mid & Small cap with their appropriate benchmarks. Since NSE & BSE have their own indices, we chose the one performing better to evaluate active returns (excess over benchmark). These returns are calculated in 2 buckets – one since 2013 when direct plans were introduced and second since 2017 when SEBI re-categorised mutual funds. Also, for each of these buckets we only considered schemes which have been active before the date and have run the whole course. Large Cap Funds (Benchmark BSE 100 TRI) As seen in the chart above, the ability of Large Cap Funds to provide active returns has reduced post categorisation/rationalisation of mutual funds. Over 3 year holding period, the number of schemes providing active returns fell from 54% to 32% and schemes with a negative active return increased from 46% to 68%. None of the schemes have been able to achieve more than 3% active returns. A similar trend can be seen in the 1 & 5 year holding period as well. Mid Cap Funds (Benchmark: NSE Midcap 150 TRI) Mid cap schemes too display a decreasing trend in active returns over benchmark as we move from 2013 to 2017 but only on a 1-year holding period basis; over 3 and 5 year returns we not only see more funds outperforming the benchmark but also achieving active returns of more than 3%. Specifically for 5 year rolling returns, funds outperforming the benchmark rise significantly from 21% to 50%. Small Cap Funds (Benchmark: NSE Nifty Small cap 250 TRI) Small caps schemes however change the narrative completely. Not only is the number of schemes providing active returns between 0-3% higher than large & mid cap but also schemes providing returns over 3% is significantly higher. A staggering 57% of small cap schemes have achieved excess returns over 3% since 2017 on a 5-year rolling return basis. Therefore, small cap schemes can definitely benefit investors with higher risk appetites. CONCLUSION Active funds can add value, but their success largely depends on the market segment. The Passive vs Active debate is likely to continue. Both approaches have their own strengths and weaknesses. For many investors with a long-term perspective that desire simplicity and low costs, passive investing offers a robust and historically proven path to wealth accumulation. However, active management can play a role for those seeking specific outcomes or possessing the expertise to potentially outperform the market. Understanding the nuances of both passive and active investing empowers you to make informed choices and embark on a successful investment journey. The “best” approach isn’t universal and often depends on individual circumstances, financial goals, risk tolerance, and investment knowledge. DISCLAIMER: This report/presentation is intended for the personal and private use of the recipient and is for private circulation only. It is not to be published, reproduced, distributed, or disclosed, whether wholly or in part, to any other person or entity without prior written consent. The report/presentation has been prepared by Privus Advisors (Firm) based on the information available in public domain & other external sources which are beyond Privus’ control and may also include the Firm’s personal views. Though the recipient recognizes such information to be generally reliable, the recipient acknowledges that inaccuracies may occur & that the Firm does not warrant the accuracy or suitability of the information. Neither does the information nor any opinion expressed constitute a legal opinion or an offer, or an invitation to make an offer, to buy or sell any financial or other products / services or securities or any kind of derivatives related to such securities. Any information contained herein relating to taxation is based on the information available in the public domain that may be subject to change. Investors/Clients should refer to relevant foreign exchange regulations / taxation / financial advice as applicable in India and/or abroad about the appropriateness and relevance / impact of the views or suggestions expressed herein, related to any Investment/Estate Planning / Succession Planning. All investments are subject to market risks, read all related documents carefully before investing. The Firm is registered with SEBI as a non-individual RIA bearing
The Dual Pillars of Investment Success
Insights The Dual Pillars of Investment Success: Timing & Time in the Market Date: April 2025 A long-standing debate in investing is whether it is better to time the market or to have time in the market. While the latter is frequently touted as the more reliable strategy, a nuanced perspective reveals that both concepts hold significant weight in achieving optimal investment outcomes. It’s a tango between strategic entry and persistent patience rather than an either-or choice. ‘Timing the market’ refers to the strategy of attempting to predict future market movements to buy low and sell high. The allure is obvious: perfectly timed trades can lead to significant and rapid gains. The returns could be enormous if you imagine buying at the absolute bottom of a market downturn and selling at the peak of a bull run. However, the reality is that most investors find it challenging, if not impossible, to consistently and accurately time the market. ‘Time in the market’, on the other hand, emphasizes the importance of holding onto your investment for the long haul, no matter what happens in the short term in the markets. This strategy takes advantage of the compounding force that results in your earnings on your investment create additional earnings over time, creating compounding growth. Although “time in the market” is usually the foundation of effective long-term investing, discounting the “timing” factor altogether might lose opportunities or suboptimal entry points. The best case usually comes with a calculated way of when and how you enter the market and then patience to allow time to work. NIFTY 50: The Shrinking Volatility with Time Analysing the rolling returns of the NIFTY 50 gives useful insights into the effect of investment time horizon on volatility. Rolling returns give a more stable view than point-to-point returns, which can be greatly affected by the start and end dates chosen. Source: NSE (Data as on 31st March 2025) Rolling return analysis shows that as the holding period increases from 1 to 3 & 5 years, volatility in returns tends to reduce. Those that remain invested through market cycles will benefit from the long-term upward trend of the market and are less likely to be negatively impacted by temporary downturns. Interestingly, the same examination of a 3-year holding period also shows that there is a 34% chance of an investor making an extra 20% of the average return when entering the market on these particular days. Since 1996, the average 3-year rolling return achieved by the Nifty 50 is 12.2%. Further insights regarding potential outcomes can be obtained through valuation metrics such as the Price-to-Earnings (PE) ratio. For instance, when the NIFTY 50 is positioned at a PE of 18x – 20x, the probability of experiencing negative returns over a threeyear investment horizon decreases from 9% to around 1%, indicating an 88% reduction in downside risk, highlighting the possibility of improving rewards through entry into the market at more moderate valuations. Source: NSE (Data as on 31st March 2025) *Since PE data is available from 1999, the first 3-year return is calculated in 2002 in the graph It is essential to recognize that this does not promote zealous market timing in hopes of finding these “lucky” days. Rather, this information serves to reinforce the point we mentioned previously: paying attention to overall market conditions and valuations can make an impact on long-term returns. Although consistently predicting these high-probability entry points is impossible, understanding that market cycles exist and being ready to invest when valuations are reasonable can help you somewhat improve your odds over time. CONCLUSION Ultimately, the most successful investment journey is often a marathon, not a sprint. By focusing on long-term participation while respecting strategic points of entry, investors can use the power of both timing and time toaccomplish monetary objectives. DISCLAIMER: This report/presentation is intended for the personal and private use of the recipient and is for private circulation only. It is not to be published, reproduced, distributed, or disclosed, whether wholly or in part, to any other person or entity without prior written consent. The report/presentation has been prepared by Privus Advisors (Firm) based on the information available in public domain & other external sources which are beyond Privus’ control and may also include the Firm’s personal views. Though the recipient recognizes such information to be generally reliable, the recipient acknowledges that inaccuracies may occur & that the Firm does not warrant the accuracy or suitability of the information. Neither does the information nor any opinion expressed constitute a legal opinion or an offer, or an invitation to make an offer, to buy or sell any financial or other products / services or securities or any kind of derivatives related to such securities. Any information contained herein relating to taxation is based on the information available in the public domain that may be subject to change. Investors/Clients should refer to relevant foreign exchange regulations / taxation / financial advice as applicable in India and/or abroad about the appropriateness and relevance / impact of the views or suggestions expressed herein, related to any Investment/Estate Planning / Succession Planning. All investments are subject to market risks, read all related documents carefully before investing. The Firm is registered with SEBI as a non-individual RIA bearing Reg. No. INA000019752 & BSEASL membership No. 2230. Registration granted by SEBI, membership of BASL and certification of National Institute of Securities Markets (NISM) in no way guarantees performance of the intermediary or provide any assurance of returns to investors.