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Context: During the July-September quarter (Q2), active equity funds attracted net inflows of approximately Rs 74,000 crore, outperforming passive equity funds (Rs 9,000 crore) and surpassing arbitrage funds (Rs 29,000 crore), as indicated by a recent study from Motilal Oswal AMC.

Details

• Active funds and passive funds represent two different approaches to mutual fund investing, each with its own set of characteristics and advantages.

Active Funds

• In active funds, fund managers play an active role in deciding when to buy, hold, or sell securities. They use their expertise to make strategic decisions based on market conditions and economic trends.
• They rely on professional fund managers who actively manage the portfolio. These managers use various strategies and styles to create and manage the fund's holdings.
• They aim to generate better returns (alpha) than the benchmark index. The risk and return in an active fund depend on the strategy adopted by the fund manager.
• Active Funds are suited for investors seeking to take advantage of fund managers' alpha generation potential. Requires active management and analysis by the fund manager.

Passive Funds

• Passive funds, including index funds and exchange-traded funds (ETFs), replicate a stated index or benchmark. Fund managers have a passive role in stock selection, and decisions are driven by the benchmark index.
• They are suitable for investors who want to allocate their investments exactly according to the market index.
• Passive Funds are appropriate for investors who want to mirror the performance of a specific market index. Involves minimal tracking error, and decisions are based on the movements of the benchmark index.

Conclusion

• Investors need to consider their investment objectives, risk tolerance, and preferences when choosing between active and passive funds. Active funds offer the potential for higher returns but come with increased management involvement, while passive funds provide a more hands-off approach with returns closely tracking the performance of the chosen index.

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Passive Funds: https://www.iasgyan.in/daily-current-affairs/passive-funds#:~:text=Passive%20funds%20aim%20to%20replicate,aim%20to%20outperform%20the%20index.&text=Active%20funds%2C%20on%20the%20other,to%20outperform%20their%20benchmark%20index.

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