Are index MFs better than actively managed large-cap MFs?

Index mutual funds are passively managed mutual funds which usually track a particular index. There are presently in total 49 large-cap mutual funds (Direct Plan) among which 17 are index mutual funds. If we look at the returns generated, JM core 11 fund, which is an actively managed mutual fund, generated the highest returns of 44 per cent in the past one year. On the other hand, ICICI Prudential Nifty Next 50 index, a passively managed index mutual fund generated the highest returns of 46 per cent in past one year.

In the past one year, it has been noticed that the ability of the mutual fund to outperform the benchmark has come down. This may be due to the fact that stock market rallies were not being wide enough for the actively managed mutual funds to outperform the benchmark. Also as per the SEBI mandate, in large-cap mutual funds, only 20 per cent of the assets can be held in stocks which are out of top 100 companies and they need to hold a minimum of 80 per cent of the assets in the top 100 companies.

Though in the long run the actively managed mutual funds would outperform the benchmark but not by a huge margin. The lower outperformance margin is evident in the actively managed large-cap mutual funds, as the industry has moved to the TRI (Total Return Index) and SEBI’s guidelines on mutual fund re-categorization.

The Beta or the risk involved in the actively managed large-cap mutual fund, may be more than the market risk but that is not the case with index mutual funds, it would be same as market risk. Though index mutual funds can’t be a complete replacement of actively managed large-cap mutual funds, they can be included in your portfolio for better asset allocation.