The Mutual Fund Show: What Are Actively Managed Funds?

In active strategy, the dynamism and real-time activity of the market are factored in and essentially go out to benefit the client much more, according to Santosh Joseph, founder of Germinate Investor Services LLP.

"But if you clearly know that the passive fund is for you, then you clearly choose the passive fund," he said.

The active segment in the debt mutual funds space has more merit because fund managers can take active calls in terms of what bonds to buy or sell, as these bonds are also traded. Hence, fund managers can take full advantage of the secondary market as well, according to Rushabh Desai, founder of Rupee With Rushabh Investment Services.

He listed these parameters to consider for active mutual funds:

• Debt mutual funds give better risk-adjusted returns.

• Better returns than bank FDs during interest rate cut cycles.

• Invest in medium- and/or long-duration funds.

• AAA bond yields are in the range of 7-8%.

"So, active debt products do much better than the passive incomes of delivering better risks at just returns. And, if the client does not understand all of these, then, of course, the passive route of the simple roll-bounce strategy works best as well," he said.

"There is so much alpha that can be generated for an investor in a well-managed fund," said Joseph.

Risk management, alpha, convenience and liquidity are all simple things that become "priceless and valuable for investors for creating a stable portfolio," he said.

"Though we missed out on the edge on taxation, we still have the benefit of a product that is superior," Joseph said.

Currently, at the peak of the interest rate cycle, it makes more sense for investors to invest a higher allocation towards market-linked products, like mutual funds, according to Desai. Medium-to-long-duration funds will have more merit at this point in time, he said.

Corporate funds, credit risk funds and target maturity funds are distinct. The simplest way to distinguish is the quality of credit and the timeframe that one is looking at, according to Joseph.

Corporate bonds are stable and there is certain predictability. In a credit risk fund, one will compromise a little on quality, "but then you are playing for the upside that is potential," he said.

"In a target maturity product, you are actually trying to see if you can get a better return than a FD."

For corporate bond funds, Joseph suggests investors invest in:

• Bonds of top quality.

• Bonds with high ratings.

• Bonds with stable yields.

"If you're looking for high returns, you should go for credit risk. If you're looking for stability but also in time, then you go for target maturity, whereas if you want top quality and you are okay with a little bit of variation in time, then you stick to good quality-rated corporate funds," Joseph suggested.

Desai is not a "big fan" of credit risk funds and recommends corporate bond funds.

With mid-cap funds, value played out while growth took a beating, according to Joseph. "The not-so-favourable theme made a big comeback."

"While patience is advocated, at some point, investors must pay attention to opportunity cost," Desai said.

One can look at other consistently outperforming midcap funds like Edelweiss Midcap or Kotak Emerging Equity. Investors can start looking at mid-cap smart beta funds, like Mid-cap 150 Momentum 50, said Desai.

Shifting funds is not an easy call after ferocious movement in markets, he said. While course correction in a portfolio takes time to show results, a good portfolio manager recovers and smoothens differences. But, in most cases, staying invested works, Desai said.

Watch the full show here