We will invest in equity due to its ease & decent returns, there are other ways but equity is the best according to me
Equity will be the growth component of our portfolio
We will invest in passive funds because most active funds most of the time can’t beat the index, many would say they prefer active funds because a skilled fund manager would manage the fund, potentially generating higher returns than the index & providing downside protection, however that’s not actually true
Active funds struggle to beat the index due to a fund manager's investing style & other reasons, additionally stocks go through cycles of underperformance causing different categories of stocks follow different cycles & various sectors have their own unique cycles, difference in returns between passive & active funds is not significant because the index efficiently selects stocks based on various factors, this efficiency is stronger for large cap stocks as they are well established & mostly efficiently priced making it difficult for active funds to outperform them, moreover the expense ratio of active funds eats into potential returns, for mid caps the situation is somewhat similar, for small caps it's a 50-50 scenario, as fund managers can avoid troubled companies & many small cap stocks are not well researched, the index may include weak stocks simply because they meet certain market cap criteria & stock prices may not always reflect their true value due to a lack of research
Active funds don’t offer true downside protection, they attempt it by reallocating to large cap stocks in bear markets but large caps also decline in severe downturns, liquidity constraints force fund managers to sell mid & small cap stocks at a loss, while fund mandates prevent full exits leaving them exposed, holding too much cash risks underperformance if markets recover quickly, additionally high expense ratios offset any downside protection making it ineffective
Even if you choose active funds, choose only one but many will argue that selecting multiple active funds provides diversification as different amc’s will perform differently & include more varied stocks, they believe this will result in decent returns since the average of all funds will be good with some performing better than others, however that’s not true
Having a portfolio of stocks is great because of the flexibility & control over your choices, but managing it can be hectic & has several drawbacks in the long run, with a personal portfolio you can easily book profits from large, mid, & small cap stocks, however with mutual funds whether index or active funds it’s difficult due to various factors that make it harder for fund managers to sell or book profits easily, in contrast, with a personal stock portfolio you can make your own decisions & book profits whenever you want, that’s another reason to avoid active funds, however the whole point of investing in mutual funds is to avoid managing a stock portfolio yourself, this is why passive funds are a better choice as they eliminate the risks associated with active fund managers, since you are not managing the investments yourself, it becomes difficult to rely on active funds because the fund manager’s decisions play a major role