Index Funds are better then diversified equity funds because of the low cost and no active management therefore the cost of transaction are the lowest.
Is this a myth or are index funds really a great investment by which an investor can make a lot of money and be better off then other mutual fund investors. As an investor myself I took up a small study which would help me make the decision whether Index funds really have an advantage.
I decided to conduct the study for 10 years or more as this is an adequate time period to check out the real performers. Therefore I found out funds that were in existence for more then 10 years. There were 29 diversified equity funds and there were no index funds. Therefore I have considered the basic assumption that Index funds would replicate the performance of Sensex (that's what every literature that I read on index funds tells me).
The results were astonishing, and they clearly showed that index funds (that is the Sensex in our case) underperformed about 87 per cent of diversified equity funds. Only 13 per cent of the funds underperformed the Sensex over a period of more than 10 years.
The worst underperformer Canara Robeco Balance -- Growth was hit by -2.38 per cent. There were only four funds out of 29 funds that underperformed the Sensex. The remaining 25 funds outperformed the Sensex.
Funds that outperformed the Sensex:
Most of the funds have beaten the Sensex by a very good margin over a period of more than 10 years. With the best fund giving nearly 20 per cent profits more than the Sensex.
This clearly shows that active mutual funds have a definite advantage over index funds. Therefore there is clearly a case to bet on diversified funds as compared to the index funds for long term investors.