ETF vs Actively Managed Fund: Which one should you rely on to create wealth?

As Exchange Traded Funds (ETFs) have lower expense ratios than the Actively Managed Funds, an investor would tend to prefer an ETF over its actively managed counterpart.

As Exchange Traded Funds (ETFs) have lower expense ratios than the Actively Managed Funds, an investor would tend to prefer an ETF over its actively managed counterpart.

Moreover, due to a sustained rally in the stock markets, ETFs have managed to outperform many of the Actively Managed Funds having the same benchmarks.

Also, huge investments of the Provident Fund (PF) money in ETFs by the Employees Provident Fund Organisation (EPFO) has pushed up the ETF kitty significantly over the last few years, making ETFs further attractive.

However, with its portfolio replicating the composition of the benchmark index, performance of an ETF almost matches the performance of the benchmark, which again reflects the market sentiments influencing the buying and selling pattern of stocks in the specific category.

So, with the entire investments of the fund in the stocks of a particular category, the performance of an ETF directly depends on the performance of the benchmark index.

On the other hand, along with stocks representing the benchmark index, the portfolio of an Actively Managed Fund also has some investments in debts, money market instruments or other less volatile instruments, making the performance of the fund relatively more stable.

There may be arguments or counter arguments in favour or against the ETFs and Actively Managed Funds. But to create wealth, an investor should choose a fund that matches his/her investment objectives and continue the investment with regularity.

So, to choose a fund to realise his/her financial goals, an investor should do proper financial planning first to identify the goals.

Once the financial goals are decided, an investor may come to know how much investments are needed for how long and which investment avenue(s) to choose depending on return and risks involved.

Depending on the available resources, the best investment would be the one that helps an investor reach a particular financial goal in time by taking minimum risk.

So, according to the financial planning, whichever investment instrument suits the most – be it an ETF or an Actively Managed Fund or a Debt Fund or a mix of the instruments – the investor should choose that instrument or a mix of the instruments.

After starting the investment journey to create wealth, the investor should continue investing as per the plan without getting perturbed by the noise around EFTs, Actively Managed Funds or others.

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