There were multiple articles backed by data revealing that passive investment is superior to active investment. Some of the data which I have collected are
- 60% of large-cap active funds underperformed their benchmarks over one year
- 75% underperformed over three years
- 93% underperformed over five years
- 74% underperformed over ten years
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Now if the active funds are underperforming, then why invest in that. The problem is that most of people invest using a broker and thus the broker gets commission when they suggest an active, regular fund. Most of the investors lose thousands and lakhs of rupees because of that.
The problem with brokers is that they are suggesting active funds as well as regular funds. Active funds are not able to beat the index, and on top of that,t you have to pay commission, which decreases the profit even more. And that's why most of the people who are actually becoming aware of this are coming out from the active investment and choosing passive investment.
I know passive investment has it's own problems but it will give you good returns in the future, that's for sure. And not only that, the index funds comes as a pack which gives the readymade diversification, whereas active funds can be or cannot be diversified. But I am not saying that we should not go with active funds. A balanced approach is needed. For large cap, the best is to go with passive funds, whereas for mid cap, small cap and flexi cap, we can go with the direct active funds. Using this strategy,y we can create that alpha for our portfolio.
The active funds can generate a very good alpha but the problem is finding those active funds. Some funds work well 1st year but 2nd year they cannot beat the index and that's how the active funds go down. Now we should simplify the investments and that's why passive funds are best for peace of mind.
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