Pune Stock：Which is Right for You： Index Funds or Blue Chip Funds？

A large-cap fund is essential to an investor’s core equity portfolio. It is because these funds are less volatile than small and mid-cap counterpartsPune Stock. But actively managed Bluechip or large-cap equity funds have been underperforming their benchmarks.

If you look at the last 3 years’ data of large-cap funds, more than 80% of them have underperformed their benchmark.

Index funds, on the other hand, have seen significant growth in popularity in the past year. As these funds are passively managed, they try to replicate the performance of the benchmark they track.

According to data from the Association of Mutual Funds in India (AMFI), the assets under management (AUM) of index funds in the fiscal year 2021-2022 reached 1.73 lakh crore, an increase of 197% from the previous fiscal year’s AUM of 58,173 crores.

When constructing your portfolio, should you look at passive schemes that track an index or go for actively managed bluechip funds? Let’s find out.Hyderabad Investment

According to SEBI’s categorisation of mutual funds, Bluechip fund is not a category. They are actively managed large-cap funds that invest in bluechip stocks of large-cap companies listed on the stock exchanges.

As most of these fund portfolios consist of bluechip stocks, according to their classification, some AMCs call their large-cap funds Bluechip Funds. Examples of such large-cap funds include Axis Bluechip Fund, SBI Bluechip Fund, ICICI Prudential Bluechip Fund, etc.

Similarly, all bluechip funds are actively managed. They invest in the top 100 companies by market cap. Active funds have highly trained and dedicated resources to study businesses and evaluate companiesSurat Stock. Fund houses also charge a higher expense ratio for active funds. It’s only natural for investors to expect them to beat their benchmarks.

So, are you better off investing in a Bluechip scheme (part of the large-cap fund category) or index funds? Let’s look at the data.

Data as of 4th January 2023. The data is the CAGR of direct funds with growth options.

Data as of 4th January 2023

The above data shows that the majority of large caps have underperformed the benchmark in 7, 5 and 3 years. On average, large-cap funds have given returns of 11.9% against 13.9% returns generated by the NIFTY 100 index in the past 7 years.

Therefore, investors would be better off investing in an index fund instead of large-cap or Bluechip funds. This way, they don’t need to worry about the performance of their scheme or selecting a fund that would outperform the index. Now, let’s understand how index funds work.

An index fund is a passive investment that tracks and mirrors an index. To match the performance of the underlying index, these funds hold the same shares as the index in precisely the same proportion as the index being replicated.

Besides the fact that a majority of the actively-managed large-cap funds have underperformed their benchmarks, there are other benefits of index funds as well.

With these funds, you don’t need to spend time researching the best scheme that would outperform in the future. Passive schemes offer investors the same return as the index. Hence, investors don’t need to worry about performance. All they need to do is keep track of the fund’s tracking error.

Additionally, passive funds are low-cost– their expense ratio is much lower than actively-managed funds.Simla Investment

The only parameter that you need to consider when choosing an index fund is the tracking errorNagpur Stock. Go for one that has the lowest tracking error.

Passive schemes with a very high tracking error can defeat the entire purpose of Index investing.

Read here to understand more about tracking errors and their impact on investors.

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