Planning a Rs 7 crore corpus in 12 years? Expert recommends active funds over index funds

Mutual fund investors often wonder whether they should choose actively managed funds or passive index funds while planning for long-term goals. The debate has become even more relevant as index funds and smart beta strategies gain popularity among retail investors. While passive funds offer low-cost market exposure.

One such query came from Ashish, a 37-year-old investor from Bengaluru and the viewer of The Money Show on ET Now, who currently invests Rs 78,000 every month through SIPs across multiple mutual funds. His portfolio includes Motilal Oswal Nifty 500 Momentum 50 Index Fund, SBI Small Cap Fund, SBI Contra Fund, Parag Parikh Flexi Cap Fund, Kotak Emerging Equity Fund, and Canara Robeco Bluechip Equity Fund. He has been investing for his daughter's future with an investment horizon of over 15 years.

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According to him, he has invested more than Rs 28 lakh so far, and the portfolio's current value has grown to over Rs 41 lakh. Apart from mutual funds, he also invests in stocks through SIPs. His target is to build a corpus of around Rs 7 crore over the next 12 years.

Shweta Rajani, Head-MF, Anand Rathi Wealth shared her views on portfolio construction, index investing, and the steps needed to achieve a long-term wealth creation goal. She said a 10% annual SIP step-up can help achieve the goal.

Rajani advised Ashish to focus first on the target corpus and ensure that inflation assumptions are factored into his planning. Looking at the size of the goal, she suggested increasing SIP contributions by around 10% every year to comfortably reach the desired corpus.

"Looking at the goal that you have, I am sure you have kept inflation in mind. What you will need to do is a 10% step-up to your SIP to be comfortably achieving your goals," she said.

Responding to Ashish's specific question about investing in an index fund for his daughter's goal, Rajani said that active fund management continues to have advantages in the Indian market.

According to her, the availability of information inefficiencies and opportunities for stock selection allows active fund managers to potentially outperform benchmark indices over time. "Over the last few years, if you see the track record in India, active management is the way to go because of the arbitrage that is available in information and understanding of company profitability," she said.

Rajani noted that actively managed funds have historically outperformed index funds by around 2% to 4% annually. While the difference may appear small in a single year, the impact of compounding over a decade or longer can significantly influence the final corpus. As a result, she suggested that Ashish reconsider his allocation to the index fund.

Instead of continuing with the Motilal Oswal Nifty 500 Momentum 50 Index Fund, Rajani recommended considering an actively managed focused fund. She suggested the ICICI Prudential Focused Equity Fund as a possible alternative.

According to her, Ashish's portfolio is already diversified across flexi-cap, mid-cap and large-cap categories. A focused fund could complement the existing allocation while maintaining exposure across market capitalisations.

"My suggestion would be do not participate in an index fund. Instead, you can go for a focused fund. It gives you a blend of large and mid-cap exposure in the portfolio," she said.

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Minor portfolio changes suggested

Apart from the index fund allocation, Rajani was largely comfortable with the existing portfolio. She said most of the schemes are good and can be retained for long-term investing.

However, she suggested replacing the Canara Robeco Bluechip Equity Fund with a multicap fund from the same fund house to achieve broader diversification. "Most of your schemes are good. You can continue to maintain them," she said.

Be selective with passive investing

Rajani also shared her broader views on passive investing and smart beta strategies. According to her, investors should avoid excessive exposure to passive funds unless they are seeking a specific investment style that is not readily available through actively managed funds.

She noted that the market now offers a range of passive products, including momentum, quality and other factor-based index funds.

"If you have something where an actively managed fund is not available or that is a style which the active fund manager is not following, then it is fine to go ahead with the index fund in that specific style," she said.

However, she suggested limiting such allocations to a small portion of the overall portfolio. Rajani added that passive products can also be useful for gaining international exposure when suitable actively managed alternatives are unavailable.

For most domestic equity allocations, however, she believes actively managed funds continue to offer a better opportunity to generate superior long-term returns.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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