Nifty 50 funds are one of the most popular index funds among investors. This is mainly due to their investment simplicity and low cost. They track India’s top 50 companies, which are considered a safe option for steady growth.
While this is true, it is important to know that Nifty 50 funds may underperform against active funds. But what is the reason behind this? Let’s explore the answer to the same here in this blog.
Why Nifty 50 Funds Underperform Against Active Funds?
There is no doubt that the Nifty 50 fund is a safe choice for investment. But as said, the performance is on the lower side when it is compared with active funds. Some of the primary reasons why this happens are as follows:
1. Limited Sector Flexibility
Nifty 50 mutual funds are tied to the index. Now, this index is heavily weighted towards sectors like banking and IT. If these sectors perform poorly, the entire fund is affected.
Active funds like UTI Mutual Funds, on the other hand, can avoid such underperforming sectors. They have the option to invest in stronger sectors. This gives them a chance to deliver better returns over time.
2. Tracking Errors and Expenses
Although Nifty 50 funds aim to replicate the index, small tracking errors reduce returns. These arise due to fund expenses, trade delays, and rebalancing differences.
On the contrary, active funds have higher costs. But they can overcome them by selecting stocks strategically to outperform the index. This results in better net returns for investors despite their expense ratio.
3. No Downside Protection
Nifty 50 funds track the index fund passively. So, it falls and rises based on the index movements in the market. They do not use strategies to manage risks or limit losses during market downturns.
Active funds, however, adjust their holdings to avoid weaker stocks. They manage allocation to protect investors during volatile or bearish market phases.
4. Flexibility in Stock Selection
Active funds have the option to change their investment strategy or mix based on the market conditions. They can switch from small and mid to large or vice versa. This flexibility allows them to capture growth opportunities beyond large-cap stocks.
Nifty 50 mutual funds cannot do this, as they are strictly limited to the top 50 index companies. This can affect their overall growth potential.
5. Risk and Return Balance
Active funds carry higher costs and depend on fund managers’ skills. But at the same time, they offer focused stock picking, research-driven decisions, and active risk management. This offers better protection against downfalls.
When compared to the passive approach of Nifty 50 funds, the performance is linked to just the index. So, any deviation from the same will be highlighted in the index performance as well.
Active Funds vs Nifty 50 Funds: Which Should You Choose?
Active funds aim to beat the market by using research to pick better-performing stocks and avoid weak sectors. This flexibility can lead to higher returns, but it comes with higher costs and depends on the fund manager’s skill.
Nifty 50 funds are simpler as they focus on the top 50 companies based on market cap. They offer low-cost, steady returns but cannot outperform the market.
Your choice depends on your goal; whether you want market-matching returns with low fees or are ready to take calculated risks for possibly higher growth.
Conclusion
Choosing the Nifty 50 mutual funds gives you market-matching returns with minimal effort, while active funds aim to beat the market through research and stock selection. But remember, active funds may not always outperform, and Nifty 50 funds cannot avoid market falls.
The best approach is to align your choice with your goals and risk comfort. Building a balanced portfolio with both can give you steady growth, managed risks, and confidence in your financial journey.
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