ETFs Vs Actively Managed MFs
11/29/2012 9:00 PM Thursday
Q) I am 35 years old and have been investing in debt for the past few years. However, I now wish to earn higher returns by investing in equities. As my job involves a lot of travel, I do not have the time to pick the best stocks. I would like to invest in ETFs as they have lower costs than mutual funds and invest in safe stocks in the Nifty or the Sensex. Please advise me on my investment plans.
- Subhan Talukdar
A) You appear to be a fairly conservative investor as you wish to invest in stocks in the Nifty or the Sensex. ETFs are one way to participate in the equity markets, but you could also look at other alternatives such as large-cap mutual funds.
ETFs invest in securities in an index such as the Nifty. As an ETF is passively managed, it simply mirrors the index and the fund manager only needs to buy or sell securities (when the index constituents change). In contrast, the fund manager of an actively managed mutual fund seeks to outperform the market by stock-picking and/or sector-picking based on comprehensive evaluations of companies and industries. The manager may frequently rebalance the portfolio to benefit from opportunities in the market. In fact, an actively managed large-cap fund may not mirror the index and may frequently buy & sell securities in its universe of large-cap stocks. Therefore, an actively managed fund may have higher expenses than an ETF as the fund house charges for professional management services.
Large-cap funds invest in stocks of well-established blue-chip companies in the Nifty and Sensex, and are diversified across sectors. These funds can deliver higher returns than the benchmark indices, especially in the long run. In contrast, ETFs effectively cap upside returns as they only try to match (and not exceed) the benchmark returns.
The following graphs compare the returns from actively managed large-cap funds with those from ETFs, the Sensex and the Nifty. On a long-run basis, the actively managed large-cap funds significantly outperformed the Sensex and Nifty as well as the ETFs. On a three-year basis, post-expenses, Franklin India Bluechip and ICICI Pru Focused Bluechip have generated more than twice the returns generated by the Sensex or Nifty. On a five-year basis, HDFC Top 200 was one of the best-performing large-cap funds and generated post-expense returns of almost eight per cent, while those of the Sensex and Nifty were less than one per cent.
Note: GS Nifty Bees = Goldman Sachs Nifty Exchange Traded Scheme. Kotak Sensex ETF was launched in June 2008 and ICICI Pru Focused Bluechip was launched in May 2008
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