What are passive mutual funds?
Passive index funds and actively managed mutual funds represent two distinct approaches to investing. Each strategy has advantages and disadvantages, catering to other investor preferences and risk tolerances.
Passive funds like Exchange-traded funds (ETFs) are investment vehicles that are created to mimic the performance of a certain market index. These funds do not actively choose individual assets; instead, they seek to replicate the performance of the selected index. By attempting to replicate the weightings and composition of the index, managers of passive funds provide investors with an inexpensive and widely diversified investment choice.
Important Points:
Index tracking: An approved market index, like the S&P 500 or the FTSE 100, is followed by passive funds. The fund seeks to provide returns comparable to the market by mirroring the weightings and components of the index in its portfolio, subject to tracking error.
Low costs: The cost-effectiveness of passive funds is well established. The related costs are usually cheaper than actively managed funds since no active management choices are involved.
Diversification: By owning a wide range of assets from the selected index, passive fund investors may benefit from broad diversification. This diversification lessens the effect of underperforming individual companies and helps spread risk.
Considerations:
Investors should consider their investing objectives, risk tolerance, and preferences when deciding between passive and active funds. Mutual funds can captivate investors seeking active management and the prospect of outperformance, while passive funds are tailor-made for those pursuing broad market exposure at lower costs. Within a diverse investment portfolio, each choice has a different function.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment