'It's a no brainer': Zerodha's Nithin Kamath steps into the active vs passive funds debate

Should one be investing in active or passive funds? According to Zerodha CEO Nithin Kamath, "It's getting increasingly harder for active funds to outperform their benchmarks".

Kamath, in a post in X on Friday, said having low-cost index funds for one's core portfolio is a 'no-brainer'. "You can complement that with other funds, but the core should be passive funds," he said.

"I have a vested interest in saying this being part of @ZerodhaAMC, but it's a no-brainer to use low-cost index funds for your core portfolio. You can complement that with other funds, but the core should be passive funds. The data shows it's getting increasingly harder for active funds to outperform their benchmarks," he wrote. 

The S&P Indices Versus Active Funds (SPIVA®) India Scorecard for 2023 reveals a significant portion of actively managed funds underperformed their respective benchmarks across various categories.

Kamath backed his argument with SPIVA data which showed nearly 51.6 percent active funds failing to beat S&P BSE 100 over 1-year period. 87.5 percent, 85.7 percent, 62 percent active funds struggled over 3, 5 and 10-year periods.

73.58 percent active funds failed to beat S&P BSE 400 Mid/SmallCap Index over 1-year period while 60, 58.14, 75.41 percent active funds disappointed the benchmark over 3, 5 and 10-year periods.

Zerodha Fund House, which recorded a significant surge in its assets under management (AUM) from Rs 500 crore to Rs 1,000 crore in just 40 days, runs two passive funds -- Zerodha Tax Saver (ELSS) Nifty LargeMidcap 250 Index Fund and Zerodha Nifty LargeMidcap 250 Index Fund.