Can I invest in both active as well as passive funds?

Investors are usually confused about the right strategy of investing between active and passively managed funds. To add to the confusion there are as many articles that favor index investing and as many that support active funds, since they would use different time periods for comparison. It is very easy to manipulate data and show data for a time period that would support your hypothesis.

To evaluate any two funds, I like to compare them over a long term period, preferably a decade and compare returns for monthly SIPs. This would take into account different time periods as well as SIPs would mean monthly entry points. We can then also take monthly exit points (XIRR or corpus achieved) to understand their performance relative to each other over a decade. This I think is a better way to evaluate two funds than even using rolling returns.

In this blog I will compare UTI Nifty 50 index fund with SBI Bluechip fund i.e. an actively managed largecap fund. We assume an SIP of INR 5,000 monthly from January 2015 all the way upto January 2025. Then we will see the corpus accumulated at the end of every month from Feb 2015 to January 2025 in both the funds.

Source: www.amfiindia.com, Shwealth data analysis.

Note: The funds shown here are just taken for illustration purpose and in no way are recommendation for investment

In the graph above we see that SBI Bluechip would have delivered higher returns (XIRR) / higher corpus in the first 40 months and after July 2018, Nifty 50 would have overtaken and would have resulted in a higher corpus for the next 31 months. Post March 2021 each fund would have overtaken the other every 2 to 4 months upto March 2023. Post March 2023, UTI Nifty 50 has overtaken SBI Bluechip in only 1 month. In the 120 months, SBI Bluechip would have resulted in a higher corpus 70 times or ~58% of time.

If we had done the analysis with starting point as January 2016, January 2017 or any other year, SBI Bluechip fund would be ahead 40-90% times. This historical analysis shows us that there is not going to be a clear winner amongst the two and they both are going to surge ahead of the other from time to time.

Instead of trying to pick a winner an investor who thinks he may need to withdraw funds from the investment is better off investing in both active and passive funds. Suppose an investor needed funds in December 2019. Here instead of pulling out money from SBI Bluechip fund because it was giving lesser returns compared to UTI Nifty 50 as of December 2019, the investor was better off selling from UTI Nifty 50, because given the historical correlation you can be fairly confident that from this point SBI Bluechip will need to give better returns if it were to surge ahead of UTI Nifty 50.