Index Linked Funds or Actively Managed Funds?

[deekay]

I am planning to invest for a very long term for say around 10 years. I am wondering which would give me better returns? An index linked fund or an actively managed fund?

Can an actively managed fund consistently beat the market? Would the returns be higher including the extra costs for the actively managed funds?

If we are investing in an index should we go for the regular open ended schemes or would an ETF like NIFTY BEES or Junior BeeS work out better?

[JPR]

Originally Posted by deekay

I am planning to invest for a very long term for say around 10 years. I am wondering which would give me better returns? An index linked fund or an actively managed fund?

Can an actively managed fund consistently beat the market? Would the returns be higher including the extra costs for the actively managed funds?

If we are investing in an index should we go for the regular open ended schemes or would an ETF like NIFTY BEES or Junior BeeS work out better?

There can be multiple views on this….. but I believe that in a market like ours, at least for a period of time, there will be a number of stocks that can outperform the market. So if one is looking for high returns only an actively managed fund with a good fund manager, would be a better option. This will however need periodic monitoring on your part and is higher in risk than an Index Fund. An Index fund is definitely lower in risk, but you may not make as much profit as an actively managed fund.

You can also look for Index Plus funds. These funds aim to generate index plus returns by investing partially in other stocks, while maintaining the low risk character of the Index fund. Unfortunately, I don’t think there are too many options in this segment currently. Exploring a combination of both Index and Actively Managed funds may be worthwhile too.

Unlike the west ETF's don’t seem to have caught on in India yet. I would think its better to wait before entering this space.

[vasa1]

Something to think about!

Parikh substantiates his argument with empirical evidence. He ran a study on the BSE Sensex for the period between 1979 and 2005 for which he constituted two portfolios: one comprising stocks that entered the Sensex during this period and another comprising stocks that went out of the Sensex when the replacement happened (we shall refer to the latter as laggards). All dividend was reinvested and rights issues bought. Returns were calculated from the day the replacement took place. Parikh found that the portfolio comprising the laggards roundly beat the portfolio comprising the incumbents (stocks that entered the index).

Source not verified: INDIAN EXPRESS DATED 20 JULY 2009 Sanjay Kr Singh Posted online: Monday , Jul 20, 2009 at 0059 hrs

[vasa1]

Here's the link that I didn't give above. Parag Parikh's views on IPO pricing are also in the article. Worth a read for those of us rustling up cash .