Active Funds Versus Index Funds

Index funds simply copy a market index at low cost, while active funds try to beat it, and many fail to do so consistently.

Should a manager try to beat the market?

Index funds

They hold the same shares as an index like the Nifty 50, matching its return at low cost.

Active funds

Managers pick stocks and try to outperform the benchmark.

Evidence

Over long periods, many active funds in developed markets fail to beat their index after fees; in India, more have beaten it, but the gap has narrowed.

Choice

Index funds suit those wanting simplicity and low cost; some prefer active management.

A benchmark test

A fund compares itself to the Nifty 50, and investors check whether it beat that after costs.

Chasing last year's best fund

Past performance does not predict the future.

Key takeaways

Index funds copy an index.
Active funds try to beat it.
Fees matter to results.
Past performance is not a guide.