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What are active and passive equity funds — and how much inflows did they receive in the July-Sept quarter?

Active equity funds are the flavour of the season for mutual fund investors. According to a recent study by Motilal Oswal AMC, during the July-September quarter (Q2), active equity funds witnessed net inflows of about Rs 74,000 crore with fund managers getting higher returns for investors through dynamic and active investing style. On the other hand, passive equity funds saw Rs 9,000 crore of inflows and arbitrage funds got Rs 29,000 crore.

What are active funds?

In an active fund, the fund manager is ‘Active’ in deciding whether to buy, hold, or sell the underlying securities and in stock selection. This fund relies on professional fund managers who manage investments. Active funds adopt different strategies and styles to create and manage the portfolio. They are expected to generate better returns (alpha) than the benchmark index. The risk and return in the fund will depend upon the strategy adopted, Association of Mutual Funds in India (AMFI) said.

How were the flows in the active equity fund in Q2?

The mutual fund industry recorded net inflows of approximately Rs 51,000 crore in Q2 of FY’24 and active equity funds led the way with net inflows of about Rs 74,000 crore, according to Motilal Oswal AMC. Investors continued to bet on active small cap funds, highlighting high investor risk appetite taking away around one-third of the Rs 33,000 crore net inflows, the study showed.

Within the Rs 42,000 crore net inflows into broad based equity funds, active small cap funds accounted for nearly one-fourth of the net inflows. Among active equity funds, the focused and ELSS (equity linked saving scheme) categories experienced the highest net outflows, totalling around Rs 2,000 crore.

The study reveals that active multi cap funds picked up steam with two NFOs garnering Rs 2,000 crore out of around Rs 8,000 crore net inflows in Q2 FY24. Active large cap funds saw net outflows to the tune of Rs 1,800 crore.

Festive offer

What are passive funds?

Passive funds – index funds and exchange traded funds (ETFs) – hold a portfolio that replicates a stated index or benchmark. In a passive fund, the fund manager has a passive role in the stock selection. Buy, hold or sell decisions are driven by the benchmark index and the fund manager/dealer merely needs to replicate the same with minimal tracking error.

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How about flows into passive equity funds?

In the July-September quarter, inflows in passive equity funds were Rs 9,000 crore. On the passive side, equity claimed the lion share with around 78 per cent of net inflows, while commodities held an 18 per cent share. Investors flocked to passive large cap funds with the category receiving around 90 per cent of all net inflows. Other passive categories like mid and small caps also received high net inflows considering relatively small assets under management (AUM).

What should investors do?

While active fund is suited for investors who wish to take advantage of fund managers’ alpha generation potential, passive fund is appropriate for investors who want to allocate exactly as per market index.

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As the fund manager manages the fund with active investing by studying the market forces and the economy, investors can hope to get better returns.

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