Mutual funds v/s Index funds: are index funds (passive investment strategy) a better investment option than mutual funds (active investment strategy), in terms of providing higher risk-adjusted returns.

Abstract This study examines the performance of forty UK unit trusts over a period of five years from September 2002 to August 2008. The performance of these trusts is examined in terms of their selectivity abilities and timing abilities. The study employs Sharpe ratio, Treynor ratio and Jensen's measure to analyze the selectivity abilities of trusts. Similarly the Henriksson & Merton model and the Treynor and Mazuy model are employed to determine the market timing abilities of these trusts. Moreover, the performance of UK unit trusts is compared to that of index funds, which represent the FTSE market indices. The results of this study indicate that UK unit trusts are unable to outperform index funds on a risk-adjusted basis. Furthermore, it would be appropriate to say that these trusts would under perform index funds if we were to consider the existence of survivorship bias in the data. Therefore, the outcome of this study supports the modern theory of Efficient Market Hypothesis. In addition, it is observed that the implications of this study are similar to those of previous studies, evaluating mutual fund performance