What are Passive Index Funds and How Do You Invest in Them?
Passive funds offer investors, especially beginners, a convenient and relatively cost-effective way to participate in the financial markets.
This article tells you more about passive funds to help you decide if such a fund could be suitable for you.
- Table of contents
- Understanding passive fund investing
- Aligning investment goals with passive funds
- How to choose a suitable passive index fund
- FAQs
Understanding passive fund investing
A passive fund is that where the fund manager plays a passive role in portfolio selection and management. Index funds and exchange traded funds or ETFs are two common types of passive funds.
Such funds aim to replicate the performance of a specific market index, such as the Nifty 50 or the BSE Sensex, subject to tracking error. The portfolios of these funds are designed such that they have a proportionate representation of the basket of securities in that index. Such funds can provide investors with broad market exposure at a relatively lower cost compared to actively managed funds.
Aligning investment goals with passive funds
Before investing in passive funds – whether an index fund or an ETF – it is important to ensure that it aligns with your investment risk appetite, investment horizon, and financial objectives. An equity index fund or ETF will typically be high-risk, while a debt ETF may entail moderate risk.
An allocation to passive funds as part of a diversified portfolio can be considered by:
How to choose a suitable passive index fund
Choosing a suitable passive index fund depends on various factors, such as your investment goals, risk tolerance, and investment horizon. Here are some tips to help you choose the right index fund:
FAQs:
What are passive index funds?
Passive index funds are mutual funds that track a specific market index, such as the S&P 500 or Nifty 50. The fund’s portfolio replicates that index, and the returns are based on the performance of that index, subject to tracking error.
Are passive index funds suitable for all investors?
Passive equity index funds are suitable for investors who want to invest for the long-term, have high risk tolerance, are looking for a relatively low-cost investment strategy and prefer a passively managed fund. However, it's essential to evaluate one’s investment goals and risk tolerance before investing. It is also advisable to consult a financial advisor before making investment decisions.
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 decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice