The active portfolio is the fund manager’s basis of the decision. It is the index is rigid about three rules and allows flexibility on the rest.
It makes things simpler. Simplicity gives room for consistency and discipline as it takes away the judgment from the act.
The returns in passive investing are like a function of this discipline. Stocks in the index are based on the set of rules applied to form the index also applied at a set frequency to rebalance the index rules are solely market capitalization.
Free-float market capitalization is applied to a universe of stocks filters of the index for the presence of derivative contracts.
The exposure towards reduces in the index, with the index constituents undergoing a churn as the index gets reconstituted periodically Active portfolios are usually leaner as compared to indices wider.
Some years active portfolios could do well and in some other and wide indices would do well. The year 2020 point to point return differential between narrower, wider indices was not much while in 2021 it was high.
Three to five years’ rolled returns of the index and active funds need to be comparative. Diversify investments through both approaches active and passive.
Rules for sector indices and thematic ones primarily emanate from eligible industries under AMFI industry classification followed by a free-float market cap.
The AMFI industry classification is arranging has systematically can capture a particular sector and a theme, rule-based index construction works.
Weight assigning is a function of free-float market cap, weights cap. Exposure to vide a sector index and an active sector fund.
In the following sector, the fund would take overweight. Diversification in both routes would be a great thing to do. A thematic index could try to capture a sub-segment of the sector.
And cater to a higher risk-reward profile while the fund would have a good mix of steady earnings companies and high-risk reward profile companies.
The passive fund or ETF is tracking the said index would yield similar returns, not outperform the index. The capacity to take drawdowns in investment is like your ability to speed while running.
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