For ten years, which is more suitable - an index fund, ETF or an actively managed fund?

I have a horizon of 10 years. Which is more suitable - an index fund, an ETF or an actively managed fund? Also, how much difference does the expense ratio make over a horizon of 10 years?
- Ravi Kokate

Right now, if you are investing in a large-cap fund, index funds would be a better choice. For individual investors, I would discourage them from investing in an ETF simply because it is not user friendly. If you can do it, nothing like it. But it is not user friendly because you have to depend on the state of the market, look at the efficiency, NAV, price and then execute the order. The open-end mutual fund framework is very convenient. You just give a standing instruction to buy, say, Rs 10,000 worth of units on a particular day every month. That simplicity of execution is effortless. So if you are investing in a large-cap fund, invest in an index fund.

We don't have any credible index funds options if you are looking at a flexi-cap or multi-cap fund that invests across the market capitalisations. The credible index fund options exist currently only in the large-cap universe. Over time, as and when the mid- and small-cap space index funds become relatively proven, consider them. But right now, I would say that I still believe in the actively managed flexi-cap fund.

Over ten years, if you can spot relatively lower expense flexi-cap funds, it would be great because expense matters. With everything else being equal, the expense is the only differentiator. If I run a fund and it goes up by 50 per cent, and I charge 2 per cent, and if you run a fund that also goes up by 50 per cent and you charge 1 per cent, you will be better. Everything else being equal, the expense will reduce your return. So look for a credible, actively managed flexi-cap fund with a lower-cost option as we still don't have a credible index fund in this space yet.

This article was originally published on November 26, 2021.