Apr 17, 2013, 09.38 AM IST | Source: CNBC-TV18

Index Funds vs Actively Managed Funds: Which is better?

In an interview to CNBC-TV18, Gaurav Mashruwala, Certified Financial Planner compared various aspects of index funds and actively managed funds.

In an interview to CNBC-TV18, Gaurav Mashruwala, Certified Financial Planner compared various aspects of index funds and actively managed funds.

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Below is the verbatim transcript of Mashruwala's interview with CNBC-TV18.

Q: While this question on the face of it may seem relevant but would you say that an actively managed fund would have done anything different given the kind of fall that we had on Friday. Where would you stand on this argument?

A: I agree with you. There are two kinds of risks that any investor would have; a systematic risk and unsystematic risk. Index funds are predominantly dealing with systematic risk on a larger scale. So, if the entire system has taken a beating then index fund will take a beating. If entire system does well then it will do well. On Friday the entire system had taken a beating.

Actively managed fund would also have unsystematic risk with it. Therefore, if for that day if the fund manager would have taken a call to stay away from Infosys then that would have been better. However, I am not sure whether anybody could take a call on that on a one particular day. So, my bet would always be that when one constructs a portfolio then the core portfolio should be index fund, which is passively managed fund and then surround it with an actively managed fund.

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Hence one particular day, one particular instance does not take us away from saying that move away from passively managed fund.

Q: In general what is the performance record? Are index funds safer than actively managed funds or are actively managed funds are high risk high return funds?

A: Yes. That is why I said systematic or if one has to use some statistical measure if one is doing beta and R2 etc. Passively managed funds will raise less and fall less. Actively managed funds could have a better performance and may even fall. The standard saying is winners rotate and one will only come to know about the winners in the hindsight. Therefore, continuously chasing actively managed fund and which are better performers are difficult. One comes to know about it later on.

Hence always have over portfolio in passively managed fund they will replicated whatever is happening in the market, whatever is happening in the system as an equity market and then build it up around based on how much risk one is willing to take with the volatility, how far one’s goals are and what kind of skills one has and the time to manage portfolio with actively managed funds, so, make combination of two, but passively managed funds; less volatile, less risky will never be the winners. Actively managed funds could be winners, could be losers, more volatile, more risky and can give better returns.

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