What are passive Mutual Funds?

What are passive Mutual Funds?

In recent years, there has been a considerable shift in investing trends. One of which is focused on passive funds. They require lesser portfolio changes or management costs and are often less expensive than active investments. As a result, many long-term investors use passive investments to build wealth.

Let's dive in deeper to learn more about passive mutual funds.

  • What is a Passive Mutual Fund?

    A passive fund is a fund that creates an investment portfolio by tracking a market index or a specific market segment. Unlike active funds, the fund manager is not required to conduct extensive research to identify the stocks as a part of the portfolio. As a result, a passive fund is a low-cost investment option.

  • The fund manager replicates the index composition. The main aim is to create a benchmark portfolio with minimum tracking error. Therefore, the returns are quite close to the overall market returns.

  • For instance, a fund tracking the BSE Sensex will have the same 30 stocks in its portfolio. Similarly, if a fund mimics Nifty, the fund's portfolio will have the same 50 stocks that are part of the Nifty index. Moreover, the stock weights are similar to the index holdings.

  • There are two types of passive mutual funds:
  • Index Funds

    Index funds mimic the underlying benchmark index. The fund manager's job is to replicate and maintain the underlying benchmark's portfolio. The main focus can be market cap, sector, theme or a broad market index.

    The funds' returns are closely similar to the benchmark. However, there may be variance in performance due to a tracking error.

  • Exchange Traded Funds (ETFs)

    Exchange-traded funds (ETFs) are funds that track the performance of an underlying index. The portfolio of an ETF closely resembles an Index.

    The underlying stocks in the portfolio determine the value of the net assets. Furthermore, ETFs trade on the stock exchange; thus, one can even buy and sell ETFs through the stock exchange platform.

  • Exchange-traded funds
    Index funds
    Mutual Fund Investment Strategy

    Understanding Passive Mutual Funds

  • Following things, you should know about passive mutual funds:
  • Investment Strategy

    “Buy and hold” is the core strategy of passive mutual funds. Since the composition mimics the benchmark index, the fund manager is not required to optimise the portfolio much. This makes passive mutual funds low-cost investment options. Additionally, passive funds recruit various investment strategies, such as tracking sector indexes, broad market indexes, etc.

  • Returns

    Passive mutual funds aim to closely replicate the benchmark index like the Nifty or Sensex or any other index. In other words, the stock representation of the passive mutual fund and the portfolio composition will be similar to the underlying benchmark. Moreover, the returns from passive funds may be close to the market returns. The gains from passive funds are also compounded over the investment horizon, making them suitable for the long run.

  • Risk

    Passive mutual funds are market-linked instruments and, therefore, a risk. The portfolio is well-diversified due to the replication of the benchmark index.

  • Portfolio

    Since portfolio composition replicates the underlying benchmark, passive funds are widely diversified.

  • Fees

    Generally, Passive funds are low-cost investment schemes that do not involve the active buying and selling of securities. As a result, all the costs associated with the fund are low compared to an active mutual fund.

  • Conclusion

    If you are aiming for long-term wealth creation, passive funds can be your next investment alternative. That’s not all. If you’re a beginner looking to choose the right fund, passive funds may be a good entry point for your step into the market.

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Disclaimer: The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information / data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risk and uncertainties that could cause actual results, performance, or event to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in the future. LIC Mutual Fund Asset Management Ltd. / LIC Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investment made in the scheme(s). Neither LIC Mutual Fund Asset Management Ltd. and LIC Mutual Fund (the fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipients before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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