Active and Passive Mutual Funds: A Practical Blend for Indian Retail Investors

Active and passive mutual funds now sit at the centre of investment debates among Indian retail investors. Rather than seeing them as rivals, many planners view them as tools that serve different roles. The key issue for investors is how to blend these strategies, based on risk tolerance, time horizon and comfort with market swings.

For many households, a practical approach is to use passive products for stability and active funds for extra growth. Passive allocations can support long-term compounding at low cost, while active strategies may aim for higher returns in specific areas. This mix helps align portfolios with goals such as retirement, education, or wealth transfer.

Advisers often suggest a core-satellite structure when using active and passive mutual funds together. The core usually contains broad-market index funds and ETFs, which set the base risk level. Around this, investors may add active schemes focused on smaller companies or themes. This structure can keep costs manageable while still leaving room for targeted bets.

Riddhesh Dalvi, Founder of Emerald Investments, highlighted suggested ranges for many investors. "For stability, a balanced portfolio normally comprises 60 to 80 per cent of its money in passive funds and 20 to 40 per cent in active funds for targeted growth. The balance changes depending on age and how much risk you can handle, but the main idea is to align your investment strategy with your financial goals," recommended Riddhesh Dalvi.

These ranges are not fixed rules but a starting point for discussion with advisers. Younger investors with long horizons may tilt a bit more towards active strategies. Those nearing retirement may prefer higher passive exposure to reduce volatility. The emphasis, however, remains on suitability rather than chasing recent returns.

India has seen strong growth in index funds and ETFs as more savers seek transparent market access. These passive vehicles track benchmarks such as the Nifty 50 and Sensex, instead of trying to beat them. Their expense ratios are usually lower than those of active schemes. This cost gap can add up, especially for long-term SIP investors.

Because passive funds simply follow the index, they remove the influence of individual fund manager views. This reduces the risk of underperformance from wrong sector calls or stock selection errors. Many new investors therefore use passive funds as a straightforward entry point into equities. The rules-based nature of such products may also appeal to people with limited time for research.

However, Dalvi pointed out that passive strategies have structural limits. "Even so, passive funds have limitations. Since they hold all stocks in the index, they cannot avoid overvalued sectors or expensive stocks. They also cannot tap into upcoming opportunities until those companies enter the benchmark. Active funds can bring real value in this gap," said Riddhesh Dalvi, Founder of Emerald Investments.

Where active and passive mutual funds can add extra value

Dalvi underlined that skilled active managers can use flexibility that index funds lack. "Skilled managers can move between sectors, find new leaders, and change their monetary positions when things are unstable. Active strategies tend to do well in sectors like mid-caps, small-caps and themes where in-depth research and strong conviction can lead to big gains over time," commented Riddhesh Dalvi.

Active funds therefore often feature in parts of portfolios targeting higher growth, such as mid-cap, small-cap or sector-specific mandates. These segments can be more volatile but may reward detailed research. For investors who understand equity risk and accept performance cycles, such exposure can complement a large-cap passive core. Selection of fund houses and managers becomes especially important in these higher-risk areas.

Investor behaviour strongly affects outcomes from both active and passive approaches. Many retail investors react quickly during market corrections, which can mean selling at weak levels. "Passive funds naturally reduce this behaviour because they do not require ongoing evaluation of individual stocks. Active funds demand more patience since performance can be cyclical and may take years to materialise. Staying invested with conviction is crucial for benefiting from an active manager's long-term strategy," commented Riddhesh Dalvi.

From a suitability angle, investors seeking low-maintenance wealth building may lean towards passive options first. Those comfortable with market volatility and aware of long-term equity potential may selectively add active funds. The focus remains on matching products with financial goals, time frames and risk appetite, rather than viewing one style as universally superior.

A simple illustration of suggested allocation ranges is shown below, based on Dalvi’s guidance.

Investor focus	Passive funds allocation	Active funds allocation
Balanced stability and growth	60% - 80%	20% - 40%

Over time, mutual funds work best when treated as long-term vehicles rather than instruments for frequent switching. Regular SIPs, realistic return expectations and disciplined asset allocation can have greater impact than category timing. For many Indian retail investors, a thoughtful blend of passive and active funds provides a practical route towards steady wealth creation in the current market environment.

The views and recommendations quoted in this article are those of the respective analysts or organisations. They do not represent the opinions of GoodReturns.in or Greynium Information Technologies Private Limited, referred to collectively as "we". The information is for education and information only, is not investment advice, and should be checked independently with licensed financial advisers before any investment decision.