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.
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 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 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.
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.
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