Skip to main content

Equity ETFs vs Diversified Equity Mutual Fund

Invest in Mutual Funds Online

Download Mutual Fund Application Forms

 

The importance of being active couldn't have been explained better. To put it simply, one needs to be active in his or her daily life, if one desires to succeed. An active mind always helps in making sound decisions which otherwise (if you are not active) could lead to chaotic situations (one does not make the right decision).

On the other hand if you remain passive (i.e. not active) in whatever you do, you will surely see yourself at the losing end.

 

Now, that you are aware of how important it is to be active, make sure that your investments are active in generating long term growth in order to make you wealthy as well as healthy.

 

While investing in mutual funds too, you investors need to be careful while selecting the right mutual funds according to your ability to bear risks. You need to keep in mind that while there are mutual fund schemes which are actively managed in order to outperform their respective benchmarks and provide a phillip to your returns, there are some passively managed funds too, with an aim to mimic or imitate their benchmarks in terms of returns and composition.

 

Let us probe further into this.

 

Actively managed mutual funds

 

Actively managed mutual funds or diversified equity schemes as we call them are always on a constant look out for opportunities across various market segments in order to generate superior returns with sole intention to beat their selected benchmark indices. The fund managers actively participate in managing these funds in order to provide superior returns; while at the same time intend to minimize the associated risks.

 

Advantages:

 

·         Superior returns

·         Diversification across various sectors and market capitalizations

·         Flexibility and liberty to change investment style and strategy to minimize risk or boost funds performance

 

Disadvantages:

 

·         Medium to high to very high risk profile

·         High transaction cost and expenses

 

Passively managed funds

 

On the other hand passively managed funds or Index Funds or Index Exchange Traded Funds (ETFs) imitate their respective benchmarks in terms of composition and returns. Their sole objective is to mirror the performance of their respective benchmark indices. Over here the fund managers are not as active as they are in managing diversified equity funds, but let the fund perform in line with the respective index.

 

Advantages:

 

·         Low transaction cost and expenses

·         Market related risks

·         No need to actively track the performance

 

Disadvantages:

 

·         No flexibility to change investment style and strategy to minimize risk or boost funds performance

·         Limited investment universe

·         Less diversification across market capitalizations

 

Wait a sec! Why are we here talking about active and passive funds, when our intention was to enlighten you about Diversified Equity Funds and Equity Exchange Traded Funds

 

Well, Diversified Equity Funds are actively managed funds and Equity ETFs are mostly passively managed funds but some fund managers are trying to make these ETFs actively managed by using re-allocation strategy but holding stocks from the selected Index itself.

 

As Equity ETFs despite being passively managed are soon catching the eyes of the investors with some recent innovative launches and ease to trade, so here we are going to talk about Equity ETFs and nothing about Index funds which continue to hold their old passive management style.

 

Now, that you are already aware of the advantages and disadvantages of both active and passive funds, let us first look at some of their performances in order to have a clear idea.

 

Mutual Fund Report Card

From the table above it is evident that diversified equity funds have given luring returns mainly over 3-Yr and 5-Yr periods. Moreover, the risk adjusted returns too have been enticing for most of the diversified equity funds.

 

However, over the past 3-Yr and 5-Yr period and also over the past 1-Yr period some equity ETFs basically focusing on banking sector have managed to outperform the diversified equity funds, but a point to note is that this out performance has come with high volatility (as can be made out from their high standard deviation of over 12%). But index based equity ETFs have broadly underperformed the actively managed diversified equity funds and have not able to deliver sufficient risk adjusted returns (as can be seen from their low Sharpe Ratio).

 

The largest equity ETF (Nifty BeES) seen treading on low path along with its

From the above graph, if one were to invest a sum of 10,000 in Nifty BeES and HDFC Top 200 Fund for a period of say 5 years, the investment would be worth 17,696 and 22,564 in Nifty BeES and HDFC Top 200 fund respectively.

 

Should one trade in equity ETFs?

 

Also a point to note here is that equity ETFs are mutual funds and not stocks. There have been many cases where people try to take very short term market calls and get involved in short term trading of equity / index ETFs (as they are easily tradeable).

 

But before doing this, they do forget that high trading may unnecessarily increase the cost and also lead them to loose out on net returns. Also trading on short term market calls attracts short term capital gains tax leading to low post tax returns from equity mutual funds.

This high trading strategy in equity ETFs is definitely of no use for one who is aiming for wealth creation from equity mutual funds.

To sum it up, a diversified equity fund with a proven track record of atleast 3 years and from a fund house having prudent investment systems and processes in place is able to broadly outperform equity ETFs and that to with lower or similar volatility but better risk adjusted returns.

However, before taking any investment decision, you as an investor need to evaluate your risk appetite, investment goals etc. Though an equity diversified fund is bound to outperform equity ETF due to its diversification across different sectors and market capitalisation and the fund manager's liberty to change his strategy based on his view on the market; You should adopt a prudent and systematic approach towards selecting and investing in the right diversified equity mutual funds (as not all diversified equity funds are well managed and able to provide superior returns).

An investment in equity ETFs can however be considered only if one has no access to unbiased investment advice or is naïve to mutual fund investing and is looking for only market related risk and returns.

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Some of the Top performing Mutual Funds are

  1. HDFC Top 200 Fund
  2. ICICI Prudential Dynamic Plan
  3. DSP BlackRock Top 100 Fund
  4. Birla Sun Life Front Line Equity Fund
  5. Reliance Equity Opportunities Fund
  6. IDFC Premier Equity Fund
  7. SBI Magnum Contra Fund
  8. Sundaram Select Midcap
  9. UTI Dividend Yield Fund

Popular posts from this blog

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...

Mutual Fund MIPs can give better returns than Post Office MIS

Post Office MIS vs  Mutual Fund MIPs   Post office Monthly Income Scheme has for long been a favourite with investors who want regular monthly income from their investments. They offer risk free 8.5% returns and are especially preferred by conservative investors, like retirees who need regular monthly income from their investments. However, top performing mutual fund monthly income plans (MIPs) have beaten Post Office Monthly Income Scheme (MIS), in terms of annualized returns over the last 5 years, by investing a small part of the corpus in equities which can give higher returns than fixed income investments. The value proposition of the mutual fund aggressive MIPs is that, the interest from debt investment is supplemented by an additional boost to equity returns. Please see the chart below for five year annualized returns from Post office MIS and top performing mutual fund MIPs, monthly d...

Benefits Of Repo Rate & CRR Rate Cut On Consumers

  How Reduction In Repo Rate & CRR Affects Customers Finally  RBI announced slashing of repo rate by 25 basis points (bps ) and cash reserve ratio (CRR) by 25 bps which industry experts believe will fuel the economic growth to some extent. Although experts were expecting higher rate cut this year. This lowering of the rate cuts has taken place for the first time in nine months. Now let's see how reducing the repo rate (defined in economic term as the rate at which RBI lends money to the banks) relates to the following individuals and sectors: Banking:   Lowering of repo rate directly reduces borrowing costs of a bank. Banks in turn reduces interest rates on different types of loans such as home, auto, business etc. Similarly trimming down of CRR allows banks to unlock money for lending to the customers i.e. with 0.25 rate cut banks are estimated to lend more than INR. 17 Crores. Consumers:   Lower repo rate does not necessarily benefit existing loan borrowers but new loan se...

Zero Coupon Bonds or discount bond or deep discount bond

A ZERO-COUPON bond (also called a discount bond or deep discount bond ) is a bond bought at a price lower than its face value with the face value repaid at the time of maturity.   There is no coupon or interim payments, hence the term zero-coupon bond. Investors earn return from the compounded interest all paid at maturity plus the difference between the discounted price of the bond and its par (or redemption) value. In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures. Zero-coupon bonds may be long or short-term investments.   Long term zero coupon maturity dates typically start at 10 years. The bonds can be held until maturity or sold on secondary bond markets.

NRI Corner: The process of remittances abroad

The process of remittances abroad, and back, is cumbersome. Here’s how you can wade through without hassles Approach The Right Place Outward remittances or the process of sending money abroad is governed by many regulations. In India, outward remittances are made mainly through banks. At the outset, you need to remember that you just cannot trust any individual or a financial firm with the responsibility of sending your money. Experts recommend that you should always try to choose a bank with an international footprint, which will make your job easier. Choose Mode Of Transfer The next step is to choose the mode of transfer. One option is to get a Foreign Currency Demand Draft ( FCDD ). This draft will be denominated in foreign currency and should be drawn in favour of the recipient/ beneficiary. The beneficiary does not necessarily need to have an account with the same bank. The other option is to send money via wire transfer. Do not be puzzled if the bank official uses the word SWIFT ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now