Is investing in index funds better from a long-term perspective?

Lately, I have noticed that most of the actively managed large-cap funds are underperforming their benchmark. Hence, I decided to invest in lumpsum in low cost Index funds for around 20 years, starting from now. However, I am not sure whether index funds are better for wealth creation over the long-term or not. Please guide.

- Rajeev Vora

This would depend upon your investment horizon. And as you have said, you wish to invest for the next 20 years, then investing in multi-cap funds would make more sense than investing in index funds. Although, we agree to the fact that index funds have fairly low expense ratio but they are not smart enough to cope with the active funds, specifically the multi-cap funds in the long-term.

You can see in the above graph that over the long-term, multi-cap funds turn out to be better than index funds. This does not mean index funds are not good enough. You can invest in them if you are a conservative investor.

Note: In the above graph, multi-cap fund is the best performing multi-cap fund in terms of five-year rolling returns and index fund tracks S&P BSE Sensex having low expense ratio and low tracking error.

Besides, currently, many actively managed funds are not able to beat the index. Even in the year 2019, they were a part of underperforming index with their high expense ratios. However, when it comes to multi-cap fund, it is a well-diversified equity fund. And in the long-term, we hope it to do better than index funds. However, if you are someone who wish to invest tactically, then investing in index fund at this moment, would be prudent by keeping investment horizon of one to one and a half year.