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Active funds can excel in volatile markets due to flexibility and timing. Passive funds are low-cost, mirroring the market, ideal for long-term, low-risk investments.
Passive vs Active Funds: Which Strategy Wins in Volatile Markets?
Authored by Kresha Gupta, Founder & Director, Steptrade Share Services: The choice between active and passive funds depends on various factors such as your risk appetite, your understanding of the market, how closely you follow the markets, and how much volatility you can emotionally and financially tolerate.
Why Active Funds Can Outperform in Volatile Markets
Active fund management tends to work better in a volatile market. Markets today are not always driven by fundamentals alone; they move on global news, sentiment shifts, liquidity pressures, and technical levels. These movements create windows of opportunity, often called momentum investing, but only when one is actively tracking the market and ready to act with precision.
Flexibility and Strategic Timing
An active fund does not mean constant trading. It means having the flexibility to act when needed, whether that’s booking profits before a correction or entering sectors that are gaining momentum. Volatility often creates temporary mispricings that can be used as an advantage by applying a mix of market experience, technical levels, and risk aware judgement. For example, when we know certain macroeconomic events, or some statements given by influencing people are likely to impact valuations of those industries, active managers can position the portfolio accordingly.
Limitations of Passive Funds
Positioning the portfolio may involve both buying and selling, depending on the specific factor driving the market movement. Sometimes it could mean increasing allocation to high performing sectors, and other times it could be about decreasing positions that are likely to face short term pressure. That kind of dynamic response is simply not possible with passive funds.
Passive funds, like ETFs or index funds, are beneficial for those who do not follow markets actively and want a low cost, risk regressive, long term investment. They don’t aim to beat the market, they mirror the market. So when markets fall, these funds fall too. There’s no downside protection, but they do provide simplicity and are useful when markets are relatively stable or trending upward.
A Balanced Approach for Retail Investors
India’s capital market today is highly sentiment driven, and active fund management gives you the flexibility to take advantage of these shifts. For retail investors, a balanced portfolio may be the most prudent strategy — maintain a balance by allocating a portion of the capital to passive funds for long term, low risk wealth creation, and deploy the rest into actively managed funds for those comfortable with higher risk and the potential for enhanced returns.
It is authored by Kresha Gupta, Founder & Director, Steptrade Share Services.
The views expressed in this article are those of the author and do not represent the stand of this publication.
Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst…Read More
Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst… Read More
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