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Are index funds over-rated nowadays?

Dhirendra Kumar sheds light on why actively managed funds still make sense over index funds

Experts nowadays recommend only index funds, but I see that these funds are neither able to beat the performance of active funds nor provide downside protection. Moreover, they are forced to hold all stocks in the index whenever a company is in the news for poor governance or fraud.
- Satish

I just couldn't agree more with you. Currently, I'm not a great believer of index funds. In fact, over the last one and one-and-a-half years, these funds have been doing well mainly because large-cap stocks have done well and that, too, in a very narrow way. Only three-four stocks have been driving the large-cap indices, such as the Sensex and the Nifty. Some index funds have become large, owing to different reasons, such as investments from the Employees' Provident Fund Organisation (EPFO) and NPS. These organisations have started investing in these funds, owing to their low-cost and institutional accountability. These organisations need to give proper justification for choosing a certain actively managed fund over others. Hence, they go for index funds, choosing which is a no-brainer and helps get us low-cost equity participation.

Barring the large-cap category, for all other categories, actively managed funds still make sense. Over a smaller time frame, actively managed funds may underperform index funds, but over a longer time frame of five-10 years, these funds beat their index counterparts hands down. In the future, there may be a time when actively managed funds will face greater difficulty in beating the index over a longer time period but I think the jury is still out.

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