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Should I switch to an index fund from a non-performing mutual fund?

Dhirendra Kumar compares investing in an actively-managed fund with investing in an index fund

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Would it be prudent to switch to an index fund from a non-performing actively managed fund?
- Devendra

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Yes, if you're sure that you can't choose a better performing fund. However, I would like to tell you that 2018 was an extraordinary year when indices did exceptionally well, while all other funds performed relatively poorly and most of them struggled to beat the index. The margin of out-performance of actively-managed funds is definitely reducing and even on a five-year SIP return, these funds struggled to outperform indices. But the year 2018 should not be your only guide, as most of the time over the last 20 years, actively-managed funds based on their five-year returns have beaten the index.

In 2018, the indices did exceptionally well since a handful of companies in the index went up so dramatically while all other parts of the market fell, like small caps went down by 30-40 per cent. Therefore, in my opinion, if you're a long-term investor, choose carefully. Select a multi-cap fund and have some small-cap and mid-cap allocations which will help generate good returns, while averaging will keep working towards your advantage.

But if you can't do it, then an index fund is also a reasonable choice. Today, you have a wide variety of low-cost index funds. The low cost itself is a huge advantage, because if an actively-managed fund charges one-and-a-half to two per cent, then it has to perform two percent better annually to match an index fund, which is charging lesser.

Also, I hope for some changes to happen in the index configuration itself, which can enhance the return of investors on index. However, having said that, I still see that the good days of actively managed funds will linger for a while.

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