COMPARATIVE PERFORMANCE ANALYSIS OF ACTIVE AND PASSIVE MUTUAL FUNDS IN INDIA

Abstract

The Indian mutual fund industry has grown at an unprecedented pace in the last decade, with AUM levels hitting new heights and retail investor participation in the industry growing at a faster pace via the systematic investment plan route. In this expansion, one of the perennial strategic conundrums for individual investors is whether to invest in actively managed equity funds with higher fees that aim to outperform a benchmark or in passively managed index funds that track a benchmark like the NIFTY 50 at a much lower cost. This study aims to answer this question by conducting an empirical comparison between selected active and passive mutual funds in India. The research is based on real-time NAV data from the official records of the As sociation of Mutual Funds in India (AMFI) via the public mfapi.in interface. The validated and pre-processed sample is a sample of 5 passive index funds and 4 large cap equity funds, with Nippon India ETF Nifty BeES as the benchmark. The analysis includes 1,304 trading days between August 2017 and August 2022, which includes the market shock and recovery from the COVID-19 pandemic. The metrics which are used for the evaluation of performance are a rich set of metrics – Compound Annual Growth Rate, annualised volatility, Sharpe ratio, maximum drawdown, beta, and Total Expense Ratio. Independent two-sample t-tests are used to make statistical inferences at a 5 per cent significance level. The empirical results show that, on average, active funds provided a CAGR of 11.95 per cent compared to 9.98 per cent for passive funds, and had slightly lower volatility as well as a better mean Sharpe ratio. The differences in returns, risk, and risk-adjusted returns were not statistically significant, however. The only statistically significant differences found were in Total Expense Ratio: Active funds were about 1.49 percentage points more expensive per year. During the study period, none of the active funds outperformed NIFTY 50 index. The study finds that there is no statistically significant evidence of the active management premium in the large-cap segment of the Indian equity market and the significant cost disadvantage for the passive investment option is more favourable for long-term investors.