When it comes to investing in the stock market, there are two main types of mutual funds that investors typically consider: index mutual funds and normal equity mutual funds. Both types of funds offer investors the opportunity to participate in the growth of the stock market, but they do so in different ways.
Index Mutual Funds: A Passive Approach
Index mutual funds are passively managed funds that track a specific market index, such as the S&P 500 or the Nifty 50. This means that the fund’s holdings are automatically adjusted to match the holdings of the index. As a result, index mutual funds typically have lower fees than normal equity mutual funds.
Normal Equity Mutual Funds: An Active Approach
Normal equity mutual funds, also known as actively managed funds, are managed by fund managers who try to pick stocks that will outperform the market. This means that the fund’s holdings are constantly changing, as the fund manager buys and sells stocks in an attempt to beat the market. As a result, normal equity mutual funds typically have higher fees than index mutual funds.
Long-Term Performance: Index Mutual Funds vs. Normal Equity Mutual Funds
So, which type of mutual fund provides better returns over the long term? The answer is that it depends.
Studies have shown that index mutual funds have outperformed normal equity mutual funds over the long term. For example, a 2018 study by S&P Global found that index funds outperformed actively managed funds in 84% of all 10-year periods between 1996 and 2016.
However, there are some years in which normal equity mutual funds have outperformed index mutual funds. For example, in 2020, normal equity mutual funds outperformed index mutual funds by an average of 6.2%.
Overall, index mutual funds have a better track record of providing higher returns over the long term than normal equity mutual funds. This is because index funds are passively managed, which means that they have lower fees and are less susceptible to the mistakes of individual fund managers.
Which Type of Mutual Fund is Right for You?
The best type of mutual fund for you will depend on your individual investment goals and risk tolerance.
If you are a long-term investor who is comfortable with a little bit of risk, then an index mutual fund may be a good option for you. Index mutual funds are a low-cost way to get exposure to the stock market, and they have a proven track record of providing good returns over the long term.
If you are a more hands-on investor who wants to try to beat the market, then a normal equity mutual fund may be a better option for you. However, it is important to remember that normal equity mutual funds have higher fees and are more likely to underperform the market.
