1. Actively managed and passively managed funds in a category are distinguished by the alpha returns which various fund managers generate in the former, over and above their benchmark index returns that replicate the market situation.
2. In a growing economy like ours, fund managers have often been able to utilize higher market volatility for alpha returns, although probability of all of them being able to do so every year is less, and this is becoming even lesser in actively managed largecap funds.
3. This is primarily because of Sebi's mandate that actively managed largecap funds will compulsorily invest 80% min. in largecap stocks, which are only the top 100 stocks as per market capitalization, leading to heavy overlaps, thus leaving them with only 20% of their AUMs to invest in the remaining 150 midcap stocks and 1000+ small cap stocks for generating any meaningful net alpha returns, after considering higher TER and higher risk.
4. Therefore, as far as largecap funds are concerned, if net alpha returns are insignificant, a lesser expensive fund should be preferred for a long-term portfolio, which are naturally passively managed funds like ETFs and Index funds, because long-term earnings and ratings among peers should always be compared during asset allocation.
5. A similar situation could soon arise in actively managed midcap funds too, after more passively managed funds are floated by various AMCs, because they would have to compulsorily invest 65% min in midcap stocks, which will be just 150 as per Sebi's market capitalization, although they would have scope to generate alpha returns by investing the remaining 35% AUM in other stocks.
6. Hence, over the long-term, investors would need to include actively manged multicap and smallcap funds, where stock universe is more, albeit with higher risk and TER, to seek any significant alpha returns from their portfolios, while selecting passively managed funds as their staple allocation.
2. In a growing economy like ours, fund managers have often been able to utilize higher market volatility for alpha returns, although probability of all of them being able to do so every year is less, and this is becoming even lesser in actively managed largecap funds.
3. This is primarily because of Sebi's mandate that actively managed largecap funds will compulsorily invest 80% min. in largecap stocks, which are only the top 100 stocks as per market capitalization, leading to heavy overlaps, thus leaving them with only 20% of their AUMs to invest in the remaining 150 midcap stocks and 1000+ small cap stocks for generating any meaningful net alpha returns, after considering higher TER and higher risk.
4. Therefore, as far as largecap funds are concerned, if net alpha returns are insignificant, a lesser expensive fund should be preferred for a long-term portfolio, which are naturally passively managed funds like ETFs and Index funds, because long-term earnings and ratings among peers should always be compared during asset allocation.
5. A similar situation could soon arise in actively managed midcap funds too, after more passively managed funds are floated by various AMCs, because they would have to compulsorily invest 65% min in midcap stocks, which will be just 150 as per Sebi's market capitalization, although they would have scope to generate alpha returns by investing the remaining 35% AUM in other stocks.
6. Hence, over the long-term, investors would need to include actively manged multicap and smallcap funds, where stock universe is more, albeit with higher risk and TER, to seek any significant alpha returns from their portfolios, while selecting passively managed funds as their staple allocation.