Why investors should take exposure to passive funds

The S&P Indices versus Active Funds (SPIVA) report for mid-2022 is out. The report once again highlights what has been known for some time – that active mutual funds are struggling to beat the benchmarks.

- Sudipta Mitu,

Let us look at the long-term results of a couple of major categories like large cap and mid- and small-cap funds. Over the past 10 years ended June 2022, 67.4 per cent of Indian large-cap funds have failed to beat the S&P BSE 100 index. The mid- and small-cap category has fared better. Here, 46.7 per cent of funds have failed to beat the S&P BSE 400 Midsmallcap index. In other words, if you had invested in a large-cap fund 10 years ago, there was about a one-third chance of your fund beating the index. However, if you had invested in a mid/small cap fund, the chances of your fund beating the index were slightly over 50 percent.

What are the implications of these numbers for investors? Most financial advisers today suggest that investors should take exposure to passive

funds based on the Nifty 50 or the Sensex in the large-cap category. The 100 stocks in this category are tracked heavily by analysts. It is difficult for fund managers to gain an information edge and outperform the benchmark in this category. The higher expense ratios of active funds compared to that of passive funds also tilts the balance against the former.