Index Fund | Actively Managed Fund | |
Objective | To invest in stocks that are part of Index (Nifty or Sensex), in the same proportion as in Index with an objective to match the returns of the Index they follow. | To invest in various stocks as per the research and discretion of the fund manager but within the limit of investment policy with an objective to outperform Index returns. |
Management Style | Passively managed, does not require a stock selection by a fund manager as the stock selection and the quantity of shares is autonomous as per their weightage in the Index | Actively managed, fund manager has leeway and discretion to buy and sell stocks to enhance returns. Choice of investment in stocks or bonds is as per the research and knowledge of fund manager. |
Cost | Lower Expense ratio hence lesser cost because of lower management fees. For example, expense ratio of HDFC Index Nifty 50 fund is just 0.4%. Index fund gives market returns at much lower cost. | Higher Expense Ratio as higher fund management fees along with other operational expenses are involved. For example, the expense ratio of HDFC Top 100 fund is 1.78% way above the index fund of the same company |
Risk | Relatively less as there is only market risk, index funds are free from company or industry specific risk. There is also a risk of tracking error i.e., extent to which the index fund deviates from the index. | Relatively High, along with market risk there is a company or industry specific risk but it can be controlled by following the proper risk management process. |
Performance | Some of the market expert believes that Index funds gives better long term returns due to less expense ratio. The HDFC Index Nifty 50 fund has given a compounding annual return of little higher than 14.5% over last 20 years which means Rs 20000 invested in this fund 20 years back became 315000 today. | The condition is India is different, there are enough opportunities for fund manager to encash hence in reality the actively managed fund performed much better in India. The HDFC Top 100 fund has given a compounding annual return of more than 19.5% over last 20 years which means Rs 20000 invested in this fund 20 years back became 715000 today. |
Flexibility | Has Lower flexibility since index fund has to replicate the index followed | Offers high flexibility as fund manager can switch between the stocks depending upon their expected performance and opportunities available |
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