Indian Investors Are Getting This Mutual Fund Strategy Wrong — Are You One of Them?

The conversation around active and passive mutual funds has become increasingly important as more Indian retail investors enter the market. Both strategies have distinct strengths, and the better choice depends on an investor's goals, risk appetite, time horizon and comfort with market behaviour. Instead of viewing them as opposing options, a more practical approach is to understand how each style adds value to different parts of a portfolio.

India has witnessed rapid growth in passive investing in recent years. Index funds and ETFs offer low-cost, transparent and predictable exposure to the market because they simply mirror benchmarks such as the Nifty 50 or Sensex.

Their expense ratios are far lower than those of active funds, which helps investors retain more of their returns over time, especially in long-term wealth building.

Passive funds also eliminate fund manager bias, which lowers the risk of underperformance caused by missed opportunities or wrong sector calls. For investors who prefer a simple and steady start, passive funds are an accessible way to participate in equities.

"Even so, passive funds have limitations. Since they hold all stocks in the index, they cannot avoid overvalued sectors or expensive stocks. They also cannot tap into upcoming opportunities until those companies enter the benchmark. Active funds can bring real value in this gap," said Riddhesh Dalvi, Founder of Emerald Investments.

"Skilled managers can move between sectors, find new leaders, and change their monetary positions when things are unstable. Active strategies tend to do well in sectors like mid-caps, small-caps and themes where in-depth research and strong conviction can lead to big gains over time," commented Riddhesh Dalvi.

For Indian individual investors, the more important question is how to make active and passive funds work together. Passive funds work well for core exposure to large-cap and broad-market segments, where keeping costs low is quite important.

Active funds provide you with more options by investing in smaller firms that are growing and topics that have a lot of potential. By using both types of strategies, investors may take advantage of the stability of passive methods and the alpha potential of active techniques. This makes their portfolio more balanced and strong.

Investor behaviour is also a big factor in how things turn out. Many retail participants tend to react emotionally during corrections, which often leads to impulsive decisions.

"Passive funds naturally reduce this behaviour because they do not require ongoing evaluation of individual stocks. Active funds demand more patience since performance can be cyclical and may take years to materialise. Staying invested with conviction is crucial for benefiting from an active manager's long-term strategy," commented Riddhesh Dalvi.

In real life, investors should pay more attention to appropriateness than historical performance. People who want to build their money steadily with minimum effort might think about passive funds. Investors who are happy with the market going up and down and realize that buying equities for the long term might make them money should use active funds.

"For stability, a balanced portfolio normally comprises 60 to 80 per cent of its money in passive funds and 20 to 40 per cent in active funds for targeted growth. The balance changes depending on age and how much risk you can handle, but the main idea is to align your investment strategy with your financial goals," recommended Riddhesh Dalvi.

Ultimately, mutual funds are long-term wealth builders, not tools for constant switching. Consistent SIPs realistic expectations, and disciplined asset allocation matter far more than chasing the trending category of the year. For most Indian retail investors, a well-structured combination of passive and active funds offers a practical path to steady wealth creation in today's evolving market.

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