Active vs. Passive Equity Funds: Understanding the Difference and Their Performance in Q2 FY24

Active vs. Passive Equity Funds: Understanding the Difference and Their Performance in Q2 FY24

Active equity funds have emerged as the preferred choice for mutual fund investors in recent times, attracting a significant share of net inflows during the July-September quarter (Q2) of FY24. According to a study by Motilal Oswal AMC, active equity funds garnered net inflows of approximately Rs 74,000 crore, driven by the dynamic and active investing style employed by fund managers. This outpaced inflows into passive equity funds, which saw net inflows of Rs 9,000 crore. Additionally, arbitrage funds attracted net inflows of Rs 29,000 crore.

The dominance of active equity funds can be attributed to several factors. Active funds offer investors the potential to generate higher returns (alpha) than the benchmark index, as fund managers actively select and manage the portfolio based on their expertise and market insights. This hands-on approach is particularly appealing to investors seeking to maximize their returns.

A closer examination of active equity fund inflows reveals a preference for small-cap funds. Investors poured approximately one-third of the total net inflows into active small-cap funds, highlighting their willingness to take on higher risk in pursuit of potentially higher rewards. Additionally, active multi-cap funds gained traction, with two new fund offerings (NFOs) garnering Rs 2,000 crore out of the total net inflows of Rs 8,000 crore in Q2 FY24.

In contrast, passive equity funds experienced more modest inflows. However, within the passive category, equity funds claimed the lion’s share with around 78 per cent of net inflows, while commodities held an 18 per cent share. Investors favored passive large-cap funds, with the category receiving around 90 per cent of all net inflows. Other passive categories, such as mid and small caps, also received high net inflows relative to their relatively small asset sizes.

The choice between active and passive equity funds depends on individual investor goals, risk tolerance, and investment horizon. Active funds are suitable for investors seeking to capitalize on the expertise of fund managers and pursue higher returns, while passive funds are appropriate for investors who prefer a more hands-off approach and aim to align their investments with market movements. Careful consideration of these factors is essential for making informed investment decisions.