Index funds vs active funds: Experts reveal how to protect and grow your portfolio in volatile markets

If you have been checking your portfolio lately, you’ve probably noticed it's not looking very friendly, the red numbers are definitely hard to ignore.

Investors are understandably nervous as world events cause markets to tremble and indexes to decline.

In times like these, it’s natural to wonder: should I stick to low-cost index funds that mirror the market, or turn to active funds to protect and grow my investments?

According to financial planners, there is no one-size-fits-all solution; instead, it all depends on your objectives, level of risk tolerance, and how you combine the two kinds of funds.

Before reading further, please note that this is just for informational purposes only and not intended to recommend any of the schemes mentioned below. You should make an investment decision based on your personal financial goals and risk appetite.

Index funds have become very popular with investors. They are low-cost, simple to understand, and they track the market. For many investors, they are a good starting point. But that does not mean index funds are always the best option.

Index funds vs active funds: What to choose?

Don’t pick sides: Mix both

Ronak Morjaria, Partner at ValueCurve Financial Services, says you don’t have to commit to just one style. "Your portfolio can comfortably have a mix of both index and active funds," he explains. "Even within index funds, you can choose different strategies, from momentum funds to low-volatility options, or a simple Nifty 50 index fund."

Active funds can sometimes outperform, depending on where you invest. "I often tell my clients that choosing between active and index funds isn’t just about cost. It really depends on the opportunities you want to capture and which segments of the market you’re investing in," says Shweta Shashtri, who is a certified financial planner.

When active funds make sense

Certain areas of the market, like mid-cap and small-cap stocks, can benefit from active management. These companies are often still growing, and not all will turn out to be strong businesses. Shweta, a certified financial planner, also highlights situations where active funds may outperform. "It really depends on where you’re investing and what opportunities you want to capture," she says.

"For example, mid-cap and small-cap companies behave very differently from large, established businesses. Many are still in growth mode, and not all turn out to be strong performers. “An index fund in this space simply buys all companies in the index, both the strong and the weak. Active fund managers study these companies closely to pick the stronger ones early and avoid the weaker ones. Smart stock selection can make a big difference here," Shweta explains.

Active funds can also provide a cushion when markets are falling. Index funds move in lockstep with the market, so a sharp decline hits them equally. "Active managers have some flexibility. They can reduce exposure to riskier sectors, increase allocation to safer ones, or even hold cash when markets look overheated. It doesn’t eliminate risk, but it can help manage downside during volatile phases," Shweta says.

Morjaria adds that investors need to think strategically about blending active and index funds. "You can use index funds where markets are efficient and broad, and active funds in areas where a fund manager’s research and flexibility can add real value," he says. “It doesn’t have to be an either-or choice, a well-balanced mix can often be more practical for long-term investors.”

Build a balanced portfolio

CFP Shweta puts it simply: you don’t need to choose sides. "A balanced approach works best," she says. "Index funds can form the backbone of your portfolio, giving broad market exposure at low cost, while active funds can target areas where research and expertise can make a difference."

Discipline matters more than choice

Morjaria emphasises that your own behaviour can matter more than the type of fund you choose. "The key is staying disciplined," he says. "Don’t panic during market swings like we are seeing now with geopolitical tensions. Stopping SIPs or withdrawing funds can derail your long-term goals more than the choice between active or index funds."

A well-structured portfolio is rarely all index or all active. Investors can handle tumultuous markets and achieve their financial objectives by combining both wisely, maintaining consistency in their investments, and exercising patience during difficult times.