Market fall reopens old debate: Active versus passive investing

Equity diversified 200546.57 200634.72 200759.52 YTD*-32.36 Equity index 200537.22 200639.13 200749.97 YTD*-26.41 *Data as on 24/03/2008
Source: Valueresearch  In fact, the debate was opened up in the US by John Bogle, author of Common Sense on Mutual Funds and former chairman of Vanguard, which specialises in index funds.  Bogle has argued that index funds are superior to actively-managed diversified funds, which cost higher at over 6 per cent because equity diversified funds have dedicated fund managers who pick and choose winners in the market.  For this expertise, Indian mutual funds take 2.25 per cent as entry fee from the investors.  Though the Securities and Exchange Board of India (Sebi) has recently removed this entry load for investors who invest directly in mutual funds, most still depend on distributors to invest in the stock market through mutual funds.  Besides the entry fee, such investors also have to pay fund management charge, which is another 2.25 per cent a year.  On the other hand, index funds have an average load of around 1 per cent and other expenses of between 1 and 1.5 per cent.  ETFs also come cheaper with almost no entry load and a total expense of .25 to .5 per cent.  This is because in both index and ETFs, the fund manager allocates the asset under management (AUM) according to the index.  For instance, a fund like Nifty Junior BeEs will invest in stocks that are on the Nifty Junior index and in the same proportion. And the objective of the fund will be to give returns that closely correspond to the returns of the stocks on the index.  However, ETFs work out even better than index funds because they can be exited at any time during the day, whereas in index funds only the