At a time when financial markets are increasingly influenced by global events rather than core fundamentals, investors should focus on blending active and passive investment strategies based on their financial goals, risk tolerance, and investment horizon to build balanced, cost-efficient, and resilient portfolios for long-term wealth creation, according to ICRA Analytics.
The firm said passive strategies are structurally competitive in large, well-researched, and relatively stable markets while active fund management can generate measurable value in comparatively volatile environments where market-sensitive factors and rapid information flow significantly influence asset prices.
“Investors can use both vehicles to navigate volatile situations and achieve their financial goals,” the report noted.
ICRA Analytics highlighted that rising geopolitical tensions, commodity price volatility, and currency fluctuations have created an uncertain investment environment, making it essential for mutual fund investors to take greater responsibility for their investment decisions and exercise caution.
The agency said investors should remain aware that mutual funds are subject to market risks and that short-term fluctuations are inevitable. It advised investors to align investments with their risk appetite, time horizon, and financial goals, while avoiding reactive decisions during periods of sharp market swings.
“Amid heightened market volatility, there is no one-size-fits-all answer, and investors should avoid viewing the choice between active and passive funds as an either-or decision. Expertise, information, analysis, portfolio optimisation, and long- and short-term return expectations should govern the choice,” said Ashwini Kumar. “The allocation between active and passive funds should be based on the statistical outcome of each strategy vis-à-vis investment objectives,” he added.
According to ICRA Analytics, active funds can add value during volatile phases by dynamically managing sector exposure, avoiding overvalued stocks, and capitalising on market dislocations, provided the fund manager has a consistent track record and disciplined investment approach.
Passive funds, on the other hand, offer low-cost and diversified market exposure, allowing investors to stay invested without the risk of fund manager underperformance.
Kumar said experience, in-depth research, and expertise become especially important when markets are driven more by global developments than underlying fundamentals.
“In such an environment, investors should focus less on short-term market timing and more on blending active and passive strategies based on goals, risk tolerance, and time horizon, ensuring portfolios remain balanced, cost-efficient, and resilient across market cycles and expected long-term wealth creation,” he said.
ICRA Analytics also said it had conducted an in-house study comparing the performance of active and passive funds to provide insights into the effectiveness of both investment strategies.