I believe that if someone has enough time to study and understand businesses, investing directly in individual companies is always ideal. But for many investors who don’t have that time, mutual funds are the go-to. This dilemma has prompted my question.
On the one hand, low-cost index funds/ETFs like Nifty 50, Nifty Next 50, or Nifty 500 offer minimal fees (around 0.05% for ETFs and 0.10–0.20% for index funds). On the other hand, actively managed funds with expense ratio on the lower end such as Parag Parikh Flexi Cap command higher fees about 0.6% but have delivered strong returns, with around 18.1% annualized over the past 10 years .
To put that in perspective with a simple cost example:
If ₹1 lakh is invested for 10 years at a hypothetical gross return of 10% per annum:
At 0.05% cost (ETF): Final value ≈ ₹2.58 lakh
At 0.60% cost (active fund): Final value ≈ ₹2.46 lakh
That’s a difference of about ₹12,000 on just ₹1 lakh over a decade, and over longer periods, the gap compounds even more.
Another angle to consider is Jack Bogle’s approach: he ranked investing criteria as expense ratio first, then turnover, tracking error, fund size, and finally fund manager risk. He also warned that as a fund’s AUM grows, it becomes harder for managers to consistently outperform.
And then there’s the index choice dilemma:
Nifty 50 is concentrated in financials and IT
Nifty 500 is much broader, which sounds good but includes illiquid small-caps and may be inefficient to track (unlike the streamlined S&P 500 that Bogle endorsed)
My question to the forum:
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For long-term wealth building in India, should investors lean toward low-cost index ETFs/funds, or select active funds like Parag Parikh?
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If index investing is the preferred approach, which index is more suitable?
Nifty 50 (top-heavy in certain sectors)
Nifty Next 50 (more volatile but potential for outperformance)
Nifty 500 (much broader, but includes many illiquid small-caps unlike S&P 500)
- Considering Bogle’s views on cost and the consistency problems active managers face as AUM grows—does the cost advantage of index funds generally outweigh the possibility of alpha-generation and diversification from an active fund like Parag Parikh?
Would love to hear your perspectives and any real-world cases or data you’ve seen!