Weigh your options before going passive on mid- and small-cap equity funds
The majority of active funds still outperform their benchmarks and passive funds don't have a long track record in these two segments
Last Updated at October 23, 2020 19:47 IST
The new fund offer (NFO) of Nippon India Nifty Smallcap 250 Index Fund is underway at present. With the launch of this fund, six passive products (index funds and exchange traded funds or ETFs) are now available in the mid- and small-cap segments. After years of underperformance by the majority of large-cap active funds against their benchmarks, many financial advisors now suggest that investors should have either 100 per cent, or at least 50 per cent, exposure to passive funds in this segment. But such a consensus does not prevail when it comes to passive funds in the mid- and small-cap segments, one reason being that not enough passive products were available here until recently. Let us examine the arguments for and against opting for passive funds in the mid- and the small-cap categories.
Get market-equivalent returns
A key reason for investing in passive funds in any segment is that the investor is assured of market-equivalent return. The latest S&P Indices Versus Active Funds (SPIVA) scorecard that is available is for year-end 2019 and it shows that only 40.91 per cent of mid- and small-cap funds were outperformed by their index (compared to 82.9 per cent of large-cap funds) over the five-year period. Proponents of passive funds, however, argue that even though data shows that the majority of active funds in the mid- and the small-cap categories managed to outperform the benchmark, there is no guarantee that the active fund you have chosen will necessarily beat the index (your fund could be part of the 41 per cent that didn’t).
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First Published: Fri, October 23 2020. 19:45 IST