Comparative Performance Analysis of Active vs Passive Mutual Funds

Abstract

This review paper will discuss the relative performance of both the active and passive mutual funds based on their performance in terms of returns, risk assumed, cost effectiveness and market environment on which their performance relies. Active funds seek to beat benchmarks by identifying the best securities and the best time to buy and sell securities, although their performance is frequently limited by larger expense ratios and lack of reliability in generating alpha. The passive funds which are used to track market indices enjoy the advantage of low costs, reduced turnover and the long-term growth of the market meaning that most investors have a stable investment. This paper summarizes empirical research in the world and in India to define tendencies in the performance of funds in different markets. The results show that passive strategies tend to perform better in efficient and stable markets whereas active funds can be beneficial during volatile markets or in less efficient markets. The review also identifies several critical determinants that influence investor decision-making and gives regions that need additional research in the emerging markets.