As a whole universe of mutual funds scheme are divided into two wide categories. 1) Is active funds and 2) is passive funds respectively. Now we are trying to know the both categories one by one.
Active Fund: Active fund is as a category, what most people think about mutual fund schemes? It’s the heart of mutual fund industry truly. As name of this category working also as well. Here a fund manager and a team of peoples are existing with different role.
Thus, fund managers managing the fund by help of strategic analysts, dealers etc with prescribed mandate of SEBI (Security Exchange Board of India) by charging a certain amount of fee respectively.
Thus, active funds are alpha driven. Alpha or fund manager’s alpha. What a fund manager is generating excess return from the respective benchmark truly. It’s available in equity & debt segment respectively.
Passive Fund: But story or description of passive funds are little tricky. Thus, role of fund manager here is nothing. Here fund manager simply replicated the benchmark respectively. In other words, here the respective fund manager holds the securities as the proposition of the benchmark and he is never generating any alpha or never tries to beat the benchmark truly. Here passive fund’s fund manager also charging a fee, but comparatively much lesser than active fund.
Thus, passive funds are beta driven. In other words overall market risk is fund risk and the particular category analyse by its tracking error. Lower the tracking errors & fund’s expense ratio better the fund.
So now what’s our consideration for investment? Thus, we never liking or dislike any category truly. Active funds are lesser risky than passive fund. Because active fund’s manager was managing the fund actively so risk was looks lesser. But an active fund’s manager only considers portfolio risk comparing with the respective benchmark and who ignores the investor’s risk appetite truly.
But in passive fund overall market risk is fund’s risk. So simply both are not appropriate for our investment objective, before going for active or passive must go through a proper risk profiling and a professional financial advisor could help you in this regards.
So after the risk profiling done, the respective advisor would suggesting you the how much equity and debt will be appropriate to archive our investment objective truly.
We have done some back testing with NIFTY Index and active’s equity & debt funds respectively. Images are attached below:
Data Source: http://www.nseindia.com and NAV of Franklin India Liquid Fund-Retail-Growth from http://www.advisorkhoj.com
Here we constructed the portfolio with composition of Nifty daily price and NAV of Franklin India Liquid fund-Retail-Growth Option (FILF-G). We could see here is that, since 08-Jan-2008 if someone had invested in Nifty till date than his return was 4.27% and the same person his entire corpus distributed among equity & debt and re-balance time to time, here we in place of re-balancing, we did P/E based repairing and result was 10.34% respectively, far higher than Nifty performance truly. Now move to next image?
NAV Data Source: http://www.advisorkhoj.com
Here we could see that, instead of NIFTY Price & NAV of FILF-G we considered here HDFC Equity Fund-Retail-Growth & Low Duration Fund-Retail-Growth and we could see that in image-1, where Nifty had generated a 4.27% and in image-2 the HDFC Equity Fund was generated 7.37% in same period of time. But combination of equity & debt portfolio stands at 13.18%. Now we could see that, a composition of equity & debt beating the benchmark and as well as respective funds truly. Now let’s try another image on same strategy.
NAV Data Source: http://www.advisorkhoj.com
Here also we could see that, fund was generated higher than benchmark and portfolio was generated much higher than fund category and Nifty Index respectively within same period of time.
So now what’s common in above three portfolios?
Only two strategies are common, what the right asset allocation is and acceptable level of volatility respectively! Here we considered 60:40 asset allocations for illustration purpose and real time asset allocation might vary person to person.
Or are you thinking that portfolio image-2 is best one? Because it was generated high return no than rest of portfolios respectively! Than till you are not understand what asset allocation stands is for.
If we seeing the above all three back tested portfolio than we reached at conclusion is that, Nifty return is in a given time period is 4.27% and within same period two multi-cap funds return was 7.37 and 7.68 Per% respectively. Here as a multi-cap category beat the Nifty in a huge margin truly and if any extra high return was generated in a particular portfolio than its all credit goes to the advisor not good or bad fund truly. #AdvisorAlpha
When we talk about fund’s performance, we mostly skipped the risk part and the reason given to an advisor to working on proper risk management frame-work truly! We mostly exited after seeing the end point performance and ignored the journey. But it’s truly because of our greed and our investment objectives are archive through only solid risk management frame-work. What’s important also!
Thus, as we earlier mention that fund managers ignore the investor’s risk appetite. So a solid asset allocation is more important than a good or best fund and asset allocation is only copy-right to an advisor truly.
Swayam Bichar Kijiye!
For any query or feedback please let us know below or mail us at: prabirsharma@gmail.com
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