Active Funds

Active and passive funds are two prominent investment strategies in the world of mutual funds. While passive funds replicate a benchmark index, active funds, or actively managed mutual funds, involve professional fund managers actively selecting and managing a portfolio of securities. Active funds are designed to cater to both short-term and long-term investment goals, offering investors a chance to outperform market indices.

As of October 2024, active equity funds held cash reserves of Rs. 1,46,957 crore, representing 4.91% of their category assets — the highest level since May 2023. This statistic highlights the flexibility and strategic potential of actively managed funds.

In this blog, we’ll explore the meaning of active funds, their features, various types, and essential tips for investing in mutual funds in 2024. Discover how professional fund managers can optimise returns and customise portfolios to meet your financial objectives.

What is an Active Fund?

Active fund is a type of mutual fund that is managed by experienced and knowledgeable experts with an aim to outperform the market’s index. The active fund makes its investments after conducting extensive research on its investment options, which involves higher costs when compared with passive funds, such as index funds that mirror the performance of the market. Hence, the investor needs to carefully examine the performance of the fund, the strategies it adopts as also his personal risk tolerance prior to investing.

Key features of active mutual funds

Active funds are designed to outperform the overall market index through strategic buying and selling of assets, driven by the fund manager’s expertise. Below are some key features of active funds:

• Objective: The primary aim of an active fund is to surpass the market index’s performance. Fund managers take a proactive approach, frequently adjusting the fund’s portfolio based on market conditions and forecasts.
• Higher expense ratios: Due to frequent trading, management fees, and extensive research costs, active funds tend to have higher expense ratios compared to passive funds. These costs reflect the intensive management and operational structure involved.
• Potential for higher returns: Active funds may offer potentially higher returns, as they aim to capitalise on market trends and opportunities. However, such returns are not guaranteed, as market conditions can be unpredictable.
• Increased risk: With dynamic investment decisions and rapid portfolio adjustments, active funds carry a higher risk. The fund manager’s ability to make sound investment choices plays a crucial role in managing this risk.
• Risk management: Despite the inherent risks, active funds are generally better equipped to handle market volatility. Fund managers use market research and their judgment to swiftly adapt to changes, while diversified portfolios help mitigate potential losses.

Types of Active Fund

The following are the types of active funds:

• Equity Funds: Equity Funds are the type of active fund invests in stocks primarily, and its managers choose stocks that are strongly predicted to beat the market.
• Balanced Funds: Such funds make their investments in equities primarily along with fixed-income securities. The fund manager adjusts the ratio on the basis of prevailing market conditions.
• Bond Funds: A Bond Fund is also called a fixed-income fund, and these make their investments in bonds as well as other assorted debt instruments, intending to provide its investors with a steady income.
• Index Funds: Even though these are passively managed typically, certain index funds can be actively managed also, and their managers aim at outperforming the index.
• Sector Funds: A sector fund focuses on certain sectors like healthcare or technology, and its managers select securities available within such specific sectors to grow potentially.
• Fund of Funds (FoFs): As a mutual fund, a Fund of Funds scheme invests in a highly diversified portfolio comprising other assorted mutual funds instead of investing directly into bonds, stocks, or other available securities. The manager of the FoF aims at a much broader diversification to achieve specific and pre-determined investment objectives by choosing and combining several funds with their respective asset allocation strategies.
• Global and International Funds: Such an active fund makes investments in selected securities that are available beyond the home country of the investor or even worldwide.

Advantages of investing in active funds

An active fund is managed based on the fund manager’s experience, judgment, and expertise, allowing for a flexible and strategic approach to investing. Below are some key features of active funds:

• Managerial flexibility: Active fund managers have the freedom to select investment options, allowing them to take advantage of market trends and invest in undervalued sectors. For example, a manager specialising in the automobile industry might identify underappreciated auto-related stocks, which can yield high returns in the long run.
• Efficient buying and selling: Active funds enable managers to engage in strategic buying and selling to offset losses with gains, providing greater flexibility in managing the fund’s performance.
• Risk management: Active fund managers use their expertise to implement appropriate risk mitigation strategies, such as hedging with derivatives and short selling. This adaptability helps them better manage market volatility and potential risks.
• Performance over time: Active funds have shown superior performance over a ten-year period. For instance, from 2011 to 2021, active funds focused on small-growth stocks often outperformed market indexes. A study revealed that nearly 88% of active fund managers surpassed their respective benchmark indexes, showcasing the benefits of actively managed investment strategies.

If you are an investor and want to start your investment journey, you may visit the Bajaj Finserv Mutual Fund platform to know more about mutual funds and SIPs. Feel free to make use of their Lumpsum calculator and SIP calculator to calculate your financial goals better.

Factors to consider while investing in active funds

Investing in active funds requires a thorough understanding of several key factors to ensure the strategy aligns with your financial goals. Here are important factors to consider:

• Fund manager's experience and expertise: The success of an active fund largely depends on the manager’s ability to make informed investment decisions. Assess their track record, market knowledge, and expertise in the relevant sectors.
• Investment strategy and approach: Different active funds follow varied strategies, from focusing on specific sectors to adopting a value or growth approach. Understanding the fund’s strategy helps align it with your investment goals and risk tolerance.
• Fees and expenses: Active funds typically have higher expense ratios than passive funds due to the cost of management, research, and trading. Ensure the potential returns justify the higher fees associated with active fund management.
• Historical performance: While past performance is not a guarantee of future results, reviewing how the fund has performed over time can offer insights into the fund manager’s skill and the fund’s potential for returns.
• Risk management: Active fund managers employ different strategies to mitigate risk, such as diversification, hedging, and tactical asset allocation. Understanding the fund’s risk management approach helps assess its suitability for your investment profile.

Top performing active mutual fund schemes to investment in 2024

*The above data is as on 17-December-2024

How to start investing in actively managed mutual funds via Bajaj Finserv?

Investing in actively managed mutual funds through Bajaj Finserv is a seamless process. By following a few simple steps, you can start your investment journey and take advantage of professional fund management. Here's how you can begin:

1. Sign up or log in to Bajaj Finserv: Visit the Bajaj Finserv website or app and create an account if you don’t have one. If you’re already registered, simply log in with your credentials.
2. Explore the mutual fund options: Navigate to the mutual funds section and browse through the various actively managed funds available. You can filter funds based on categories like equity, debt, or hybrid, and assess their performance, risk level, and objectives.
3. Select an active fund: After reviewing the details, select the actively managed fund that suits your investment goals. Pay attention to the fund’s manager, strategy, and historical performance before making a choice.
4. Complete the KYC process: If you haven’t completed the Know Your Customer (KYC) process, you will need to submit the necessary documents like PAN card, address proof, and other details as per regulatory requirements.
5. Make the investment: Choose the amount you want to invest and complete the payment via the available options, such as bank transfer or UPI. After the payment, you will receive confirmation of your investment.

By following these simple steps, you can start investing in actively managed mutual funds through Bajaj Finserv and benefit from expert fund management.

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