Performance Evaluation of Investments under Active and Passive Investment Strategies

An active investment strategy is expected to be superior in returns than passively managed investment. This is in view of the management cost while the passive should precede active in terms of their returns when efficiency is taken into consideration. Investors always have their eye on the risk - return characteristics of the investment. The choice of investment strategy depends upon the investors’ assumption regarding the efficiency of the market. Active investors assume the market to be inefficient and expect to earn abnormal returns while the passive investors assume the same to be efficient and believe that no one can earn abnormal returns. Mutual Funds represent the active investment while Exchange Traded Funds (ETF) represent the passive investments. This study focuses on the performance evaluation of select mutual funds and exchange traded funds. These investments are evaluated based on four parameters, namely risk and return characteristics of each fund, performance of the funds in comparison to their benchmark index, tracking error of ETFs and the expense ratio involved. The study revealed that there is no much difference between the active and passive investment in terms of their risk- return characteristics and performance compared to the benchmark index but the tracking error and the expense ratio are the parameters that differentiate the strategies and makes the passive one attractive.