Active vs Passive Investing

Active vs Passive Investing in India: Is It Time to Switch to Index Funds?

By
March 20, 2025

For decades, investors in India have relied on mutual funds to grow their wealth. However, investing is all about choosing the right financial asset and having the right strategy, active or passive. Actively managed funds are traditionally preferred, but index funds are gaining popularity due to their low costs and returns. So, is it the right time to make a switch? 

In this article, we’ll explore more about active and passive investing, discuss why index funds are gaining popularity and help you make the right choice. 

Understanding Active Investing

Active investing refers to a strategy where managers make decisions about buying and selling assets with the goal of earning maximum returns. The fund managers analyse the rights assets and assess which one requires more time and expertise. They manage the investor’s portfolio by doing deep market research. 

Advantages of Active Investing:

  • Investors have the potential to earn high returns on their investments in mutual funds. 
  • Investments are being made after deep market research by a professional.
  • There is flexibility in making adjustments as per the changing market conditions.
  • Fund managers can take advantage of the opportunities and make timely decisions.

Disadvantages of Active Investing:

  • There is always a risk of wrong investment decisions and human errors.
  • Investors have to pay higher management fees.
  • Active investing is more time-consuming as it includes market research and constant monitoring.

Understanding Passive Investing

Passive investing involves replicating the specific market index. In this, investors seek to mirror the performance of an index and hold the same securities in similar proportions. Index mutual funds are one of the prime examples of passive investing. 

Advantages of Passive Investing:

  • Since no manager is involved in the investing process, the costs are typically lower compared to the actively managed funds.
  • There is no risk of fund manager’s bias or human errors.
  • The transparency is maintained as it’s always clearly stated in the funds.
  • The passive investing process is relatively easy to understand and implement and saves investors time and effort.

Disadvantages of Passive Investing:

  • In passive investing, there is no scope to beat the market returns, and there is no opportunity to outperform them.
  • Investors can’t make their own individual decisions.
  • Passive investors cannot adapt quickly to changing market conditions.

Why are Index Mutual Funds Gaining Popularity in India?

Index mutual funds are becoming a popular investment choice among investors due to their simplicity and low expense ratios. It is a stable option for many investors, and here are the reasons why it’s a preferred choice:

  • Cost-Effectiveness: These funds don’t include fund managers and are a great option for investors who are looking for budget-friendly investing solutions. 
  • Simplified Diversification: Investors can conveniently diversify their portfolios while reducing the overall risk.
  • Performance: Active investing involves beating the market, and many fail to do so. On the other hand, index mutual funds offer market-matching returns, which is a reliable choice for long-term investors.
  • Transparency and Simplicity: Index funds include transparency as investors know what they are investing in, and there is no need to take constant follow-ups from the managers.

Should You Switch to Index Mutual Funds?

Switching to index funds depends on your financial goals and risk tolerance, and here’s how you can make a choice:

  • Long-Term Investments: Index funds are a perfect choice for long-term investments, as they are low-maintenance and cost-efficient.
  • Aggressive Investments: Active investing is better for those who are comfortable bearing market risks and want to outperform the market.
  • Beginner Investing: First-time investors can choose index mutual funds because they are easy to understand and don’t require market knowledge.

Final Thoughts

Both active and passive investing have their own advantages and disadvantages. Make sure to choose a reliable platform like Bajaj Finserv when investing in mutual funds. It offers a seamless investing experience and has over 1000 fund schemes to choose from. So, if you prefer long-term, low-maintenance and hassle-free investment, then go with passive investing. Otherwise, you can go with active investing.