Passive Investing

The passive Investing is a popular investment strategy worldwide. This strategy aims at getting maximum returns with minimum sales and purchase.

What is Passive Investing?

Passive investing strategy aims at keeping costs as low as possible, but building on returns. This strategy looks to avoid any fees or limited performance that occurs with trading frequently. It focuses on building on wealth gradually.

It emphasises on buying security for long-term and therefore it is also known as the buy-and-hold strategy. This means that it focusses on buying a good collection of long-term holdings that are balanced across various industries, sectors, Market capitalisation sizes and countries. These holdings are never sold under almost any circumstance despite the distress in conditions.

Passive investing works well under the majority of the circumstances because investors are protected from their own irrational behaviour. Investors are prone to panic or have little or no knowledge of Accounting and finance along with time constraints. The passive investing strategy helps investing at a low cost and gaining returns in the long-term.

Passive Investing and Index Funds

Passive investment strategy has received due attention only in the past few decades. Index Funds help in taking the full advantage of this strategy by helping with regular purchases along with other additional purchases through the dollar-cost averaging method.

Index funds were introduced in the 1970s. It made some successful returns in the market. In the 1990s, ETFs that tracks major indices like SPDR S&P 500 ETF (SPY), made this process simpler by letting investors trade index funds like stocks.

Benefits of Passive Investing

Passive investing through indexing is a brilliant way of diversification. Maintaining a well-diversified Portfolio is essential for investors to successfully invest.

1. Low fees

As there is no fund management team to pick stocks, it comes at low cost. Passive stocks follow the index they employ as the benchmark.

2. Efficiency

Passive investing is a buy-and-hold strategy, which helps investors to assess and hold their stocks for the long-term. Therefore, the investor will not be seeing any massive Capital Gain within a year, which leads to tax-Efficiency.

3. Transparency

Its major advantage is when passive investing is done through index funds. It is because assets are clearly visible when it comes to index funds.

4. Ease of implementation

Since it involves index funds, a group of indices is easier to implement and also comprehend than a more dynamic strategy. Dynamic strategies involve constant research and adjustment.

Difference Between Passive Investing and Active Investing

Passive investing and active investment strategies have certain differences.

They are mentioned below:

Types of Passive Investing Strategies

Passive investing is about portfolios tied with index funds or ETFs. However, take a look at the strategies mentioned below:

1. Index Fund

An investor can buy index funds to take complete advantage of this strategy. Index fund purchases the entire index stock with the same proportion as the index. This can be purchased from distributors and fund houses online. One of the major advantages of index funds is that the costs are extremely low as compared to active funds.

2. Exchange Trade Funds

Exchange Trade Funds (ETFs) create a portfolio of index stocks in the same proportion as the index fund. However, ETFs are listed on the stock exchange and can be purchased and sold at popular well-known stock exchanges. Investors can avail ETFs on gold, silver, equity indices, debt market indices, etc. This can be purchased and sold through the investor’s existing equity Trading Account and can be held under the regular Demat account.

3. Direct Equity

Investors can use the passive investing strategy with direct equities too. But the challenge will lie in the tracking index changes, weightage changes, corporate actions among others.

4 Major Tips of Passive Investing

If you are looking for investing with the passive investing strategy in mind, there are certain things you should be aware of. They are mentioned below:

1. Long-term plan

If you are looking forwards to invest in a long-term, then you should opt for this strategy. Otherwise, it is advisable to consider other options for investment.

2. Wanting to spend less

As an investor, if you are looking to spend less because of various reasons, a passive investment strategy can be considered.

3. Time constraints

As an investor, if you don’t wish to spend much time managing assets, then this strategy would be ideal for you.

4. Difficulty with interference

If you are looking for a strategy that will help you deal with not interfering with your investments, then you should opt for the passive investment strategy. It will help you keep yourself away from interfering with your investments in periods of panic or distress. This will help you deal with interference that is usually the problem with investing regularly.

Frequently checking portfolio will bring various emotions in play like over-enthusiasm or discouragement and panic. In such times, investors are bound to transfer funds. This goes against the core principle of passive investing.

Passive Investing a Boon in India

In India, the passive investing strategy in exchange-traded funds (ETFs) is gaining momentum. According to data from the Association of Mutual Funds in India (AMFI), ETFs attracted Rs. 24,083 crore in the first eight months of the financial year 2020. This was because of double inflow based on Large cap funds and half of the total inflows based on Equity Funds during the time. Therefore, the combined flow in equity scheme between April and November 2019 was Rs. 48,891 crore.

A report mentioned that the lower expense ratio, market polarisation for large-cap stocks, converging returns with large-cap funds, provident funds investment in an equity markets by ETFs play the major role in this increase.

Best Passive Investing Funds 2024 - 2025

Here are the best index Passive Funds you can choose to invest:

*Below is the list for Index Mutual Funds having atleast 15 Crore or more in Net Assets.

Conclusion

The passive investing strategy has yielded successful results so far. However, it is important that investors don’t predict future results based on historical data. It is important to understand various aspects of investing well and then commit to it.