Passive investing involves buying and holding assets for a longer period. Unlike active investing, there is less frequent buying and selling in the passive investment style. There are various types of passive investing, including investing in real estate or investing in dividend-paying stocks.
A popular type of passive investing is investing in index funds. These funds do not require active fund management as they mimic stock market indices such as NIFTY50. These funds buy and sell stocks only when stocks enter or exit the indices tracked by the fund.
Here are some of the primary features of passive investment funds:
Passive investing is a style of investment that uses the buy-and-hold portfolio strategy to maximise its returns. The goal is to never sell your holdings, even if the market fluctuates dramatically. Your portfolio should replicate the financial index performance to maximise its returns.
One of the most common passive investing strategies is to invest in an index fund. These are passively-managed funds that replicate the performance of an underlying benchmark index, such as NIFTY50 or NIFTY100. The fund managers attempt to match the returns of the index by adjusting the holdings of a passive fund. Index funds offer simplicity, and investors can benefit as the market increases over time.
Passive investing originated in the United States in the 1970s. In the 1950s, in post-WW2 America, all funds were active. Between the 1950s and 1970s, academics such as Burton Malkiel started publishing research in favour of diversified portfolios. In his famous book, “A Random Walk Down Wall Street,” Malkiel argues that a diversified portfolio is better for investors than buying individual stocks or investing in actively managed portfolios.
Legendary investor Jack Bogle got inspired by these academic findings and the 1973 market crash. So in 1976, Jack’s firm, The Vanguard Group, launched the world’s first passive index fund – the Vanguard 500 Index Fund.
Since then, passive investment has grown in the US in a big way and today, more assets are invested in passive funds than active funds.
Passive investing involves investing in passively managed funds. On the other hand, active investing refers to investing in actively managed funds with frequent buying and selling. In actively managed funds, fund managers actively try to maximise the gains by buying potential winners and minimise the losses by selling potential losers. While active funds are constantly trying to outperform the benchmark, they may not always be successful in their objective.
Here are some recent statistics on active vs. passive funds from India. According to data from SPIVA (S&P Indices versus Active), as of June 2020, 80.43% of active funds underperformed the BSE 100 index. On a one-year basis, 48.39% of the funds underperformed the BSE 100 index. These statistics show that 80% of funds could not match market returns, let alone beat them. In contrast, by their very nature, passive funds are designed to match the returns of the indices they are mimicking.
Active investors have a completely different view on building wealth than passive investors.
There is a lack of flexibility in the portfolio’s management; however, passive funds have extremely low expense ratios.
Whether you select an actively-managed fund or go with passive investing depends on your market understanding. Passive investing is cost-efficient and less complex, making it ideal for new investors. On the other hand, active investing offers flexibility which can be suitable for experienced investors.
While passive funds have many benefits, they also have a few limitations:
Passive funds mimic the market, so there is no scope for the fund to outperform the benchmark. In contrast, actively managed funds are constantly buying and selling stocks to try and stay ahead of the benchmark. In addition, active funds can react to market changes and reshuffle their portfolio to maximise gains where passive funds do not have such flexibility.
If the market falls by, say 5%, passive funds will experience a similar loss. Fund managers cannot take any action to minimise the losses. In comparison, fund managers can act swiftly in response to a falling market in active funds and mitigate their losses. They can also take advantage of falling prices to make new investments at low prices.
Here are a few factors to consider before selecting passive investing instruments:
Passive investing is ideal for investors looking to match the returns offered by the benchmark and not outperform the benchmark. On the other hand, active investing is more suited for investors willing to take risks to get higher returns than the benchmark. Sometimes these risks pay off, and sometimes they do not. To get started, visit Navi Mutual Fund now!
*Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
Mutual Funds
15 Best Direct Mutual Funds in India 2023 – Top Direct Mutual Funds
Direct mutual funds or direct mutual fund plans are mutual fund schemes that are sold directly from... Read More »Mutual Funds
20 Best Debt Mutual Funds to Invest in India 2023 – Top Performing Debt Funds
Debt mutual funds are mutual funds that invest in fixed-income securities such as corporate bonds, ... Read More »Mutual Funds
10 Best Conservative Hybrid Mutual Funds in India 2023 – Benefits and Returns Calculator
A conservative hybrid fund is a type of hybrid mutual fund that invests 75%-90% of its overall asse... Read More »Mutual Funds
10 Best Blue Chip Funds to Invest in India 2023 – Calculator and Returns
Blue-chip funds are basically large-cap funds that invest a major portion of their assets in stocks... Read More »Mutual Funds
List of Best Flexi Cap Mutual Funds to Invest in India 2023
Flexi-cap funds are mutual fund schemes that invest in stocks of companies across market capitalisa... Read More »Mutual Funds
Index Fund – Types, Benefits, How does It Work and How to Invest in 2023
What is Index Fund? An index fund is a passively-managed mutual fund with a portfolio built to t... Read More »Mutual Funds
10 Best FMCG Mutual Funds to Invest in India 2023
Fast-moving Consumer Goods (FMCG) mutual funds are a type of mutual funds that invest in companies ... Read More »Mutual Funds
List of 10 Best Gold Mutual Funds in India to Invest in 2023
Gold Mutual Funds are funds that invest in gold and gold-related assets such as bullion, coin... Read More »Mutual Funds
20 Best Index Funds in India to Invest in 2023 (27th Jan)
What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »Mutual Funds
15 Best Mid Cap Mutual Funds in India to Invest (Updated on Jan 2023)
A mid cap mutual fund is a type of mutual fund that invests in the stocks of mid-cap companies. As ... Read More »Mutual Funds
10 Best Corporate Bond Funds in India 2023 – With Returns
Corporate bond funds are debt funds that invest at least 80% of the investment corpus in companies ... Read More »Mutual Funds
Best Arbitrage Mutual Funds to Invest in India: Returns and Taxation
Arbitrage funds are hybrid mutual fund schemes that aim to make low-risk profits by buying and sell... Read More »Mutual Funds
Top 10 Chit Fund Schemes in India in 2023
Chit funds are one of the most popular return-generating saving schemes in India. It is a financial... Read More »Personal Loans
₹15,000 Personal Loan: Features, Benefits, EMI and Interest Rate
Financial emergencies can be short term and you might not always require a large amount to handle t... Read More »Personal Loans
Personal Loan Interest Rates in India – Charges and Processing Fee
Applying for a personal loan? Have you compared the personal interest rates and processing fees? ... Read More »Mutual Funds
10 Best Gold ETFs to Invest in India [2023]
Gold ETFs or Gold Exchange Traded Funds are passively managed funds that track the price of physica... Read More »Health Insurance
TPA in Health Insurance – Full Form, Functions and Roles
TPA (full form – Third Party Administrator) is a licensed intermediary between health insurance p... Read More »Banking
ATM Card AMC (Annual Maintenance Charge): Explained
ATM Card AMC (Annual Maintenance Charge) is a maintenance fee levied by banks every year. This debi... Read More »Mutual Funds
Top 10 Demat Accounts in India [Lowest Brokerage Charges]
A Demat account was created to eliminate the time-consuming and inconvenient procedure of purchasin... Read More »Mutual Funds
20 Best Index Funds in India to Invest in 2023 (27th Jan)
What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »All information is subject to specific conditions | © 2023 Navi Technologies Ltd. All rights are reserved.
Start Small. Dream Big.
Start your Investment Journey with just ₹10