New Year special: Should you switch to passive mutual funds in 2019?

Actively-managed equity mutual fund schemes had a tough year in 2018. Only four per cent actively-managed mutual fund schemes managed to generate positive alpha for the investors in the last year. Passively-managed schemes like index schemes and exchange-traded funds (ETFs) clearly edged out their actively-managed peers in 2018.

For example, top 14 schemes in around 100 largecap funds are all index funds or ETFs. These data points compelled us to look at the long track record of both active and passive funds to help our readers make an informed investment choice to reach goals with ease.

We at ETMutualFunds.com. decided to take out rolling returns of actively-managed funds and passive funds, including index funds and ETFs. Since the aim of this exercise is to make a choice between active vs passive, we restricted our study to two mutual fund categories- largecap and midcaps.


We calculated five- and seven-year rolling returns, rolled on a daily basis over a period of 20 years starting December 1998. Well, this data is based on past performance. Going back to basics, higher the sample size higher is the reliability of study’s outcome. That is why we have chosen a long period of 20 years for our study.

By now, our regular readers must be aware of rolling returns, but for the first timers, it is like a daily SIP for a certain interval and then taking an average of the series of returns. For more on rolling returns, read this: What is a rolling return?

Result of our study: In the midcap category, the clear winners were the actively-managed funds. However, the alpha generation was restrained in the largecap category.

Here are the details: In the midcap category, while Nifty ETFs gave CAGR 14.49 per cent and 12.97 per cent and midcap index funds gave 12.79 per cent, 11.72 per cent respectively in five- and seven-year period, actively managed funds on an average gave 17.50 per cent and 16.77 per cent in the same time period.

Sensex ETFs on an average generated CAGR rolling returns of 13.39 per cent and 12.21 per cent in five- and seven-year period. Similarly, largecap index funds gave 11.67 per cent and 10.90 per cent. On the other hand, actively-managed largecap funds gave 14.53 per cent CAGR rolling returns (5-year period) and 13.55 per cent (7-year period).

See table below for details:

	5-yr rolling returns (%)			7-yr rolling returns (%)
	Average	Min	Max	Average	Min	Max
Largecap
ETFs	13.39	-0.2	44.65	12.21	5	30.01
Index funds	11.67	-2.93	43.84	10.9	2.96	28.06
Active funds	14.53	-13.07	63.04	13.55	-5.47	43.18
Midcap
ETFs	14.49	-0.27	46.35	12.97	4.68	29.83
Index funds	12.78	-2.81	45.95	11.72	2.69	29.75
Active funds	17.5	-16.94	74.8	16.77	-13.86	53.48

Source: Ace MF

To conclude, alpha generation in largecap schemes has shrunk. Largecap investors may look at passive funds while choosing a fund to invest. However, for investors in midcap and the riskier categories, active funds make more sense.

Investors must discuss their investment plans with their advisors before investing.