Investing in mutual funds is a way to build wealth and achieve financial goals. For this, investors have two popular options available in the market in the form of index funds and actively managed funds.
For investors who are interested in these mutual fund types, it is important to thoroughly know the benefits and risks associated with them. In this blog, we will explore these two funds and the risks associated with them.
Table of Contents
Nifty 50 Index Fund
Nifty 50 index fund is a type of index fund that aims to replicate the performance of the Nifty 50 index.
Nifty 50 index is an index of 50 well-established and large companies listed on the National Stock Exchange (NSE) of India based on their market capitalization and high returns which can be calculated using the SIP calculator.
Most of these funds are index funds that replicate the Nifty 50 index meaning their portfolio mirrors the composition of the Nifty 50 index.
Actively Managed Funds
Actively managed funds are managed by fund managers who make choices on which stock to purchase and sell to get better returns on the investment.
These funds are not affiliated with a specific index and they tend to have fewer restrictions and more flexibility in the investment strategy.
Hybrid funds, equity funds, debt funds, etc. can be actively managed funds. They incur higher costs due to active management compared to nifty 50 index funds.
Nifty 50 Index Fund vs Actively Managed Funds
Let us compare these fund types to help you understand the difference better.
Expense ratio
Index funds usually have lower expense ratios than active funds. This is so because index funds do not bear the expenses like high portfolio turnover and research costs that come with active management.
For investors who are looking for broad market exposure, index funds offer a more affordable option due to their lower charges.
Nature of Fund
Active investing requires hands-on management, in which the fund manager chooses stocks, chooses when to make transactions, and looks for ways to outperform the market.
Whereas investing in index funds uses a passive strategy that attempts to mirror benchmark results without requiring active involvement from the fund manager.
Fund Management
As fund managers make investing decisions, active funds usually involve fewer efforts from the investor. Managers make decisions on behalf of investors, who check the performance of the invested stocks regularly.
Index funds, on the other hand, need little effort because they follow benchmarks passively. Because index funds don’t require much continuous management, investors select them depending on their goals and risk tolerance.
Associated Risk
Through diversification over a wide range of securities within the benchmark index, index funds reduce unsystematic risk. The risk involved in selecting individual stocks is decreased by using this passive strategy.
On the other hand, the active funds may indicate higher risk levels depending on the fund’s investment strategy and asset allocation.
Returns
After deducting costs and tracking errors, index funds closely match the performance of the underlying index and follow benchmark indexes. On the other hand, active funds depend on the fund manager’s experience to produce returns that could surpass the benchmark.
Compared to index funds, the performance of active funds might be more volatile even though their goal is to outperform the index.
Conclusion
For SIP investing, Nifty 50 funds and actively managed funds provide different risk profiles. Through cost-effectiveness and wide diversification, index funds reduce risk, but they are still vulnerable to fluctuations in the market. Actively managed funds have the potential to yield better returns, but there are risks associated with them.
