Cost Efficiency and Expense Ratios: Comparing Active Portfolio Management Strategies with Indexation

Abstract

This research scrutinizes the efficacy of active portfolio management versus passive portfolio management in equity mutual funds from 2005 to 2023. It evaluates the efficiency of these investment strategies, the performance of actively managed portfolios against benchmarks, and if there isjustification for higher costs of management, using Sharpe, Treynor, and Omega Ratios along with Tracking Error. During high volatility periods, passive funds displayed a mixed performance, while active funds showed resilience, suggesting superior risk management. In recovery and growth periods, as well as over the full lifetime, active funds generally outperformed passive ones, with many achieving positive and high Treynor Ratios, indicating effective management long-term. Higher costs, associated with active management, are justified by superior risk-adjusted returns and better performance during volatile periods. This research contributes into the comparative efficacy of active versus passive management strategies. Future research could extend the timeframe, conduct sectorspecific analyses, and incorporate advanced metrics to provide more comprehensive insights.