Importance of Passive Funds

In the world of mutual funds, you are spoilt for options when looking for the most appropriate investment avenues. With the increasing popularity of passive funds, several fund houses are offering a passive investment style option as it requires less portfolio management and is less expensive than active funds. Vardan Pandhare explains the intricacies of passive funds to build wealth

- Vardan Pandhare

Does the term ‘passive investment’ have a ring of boredom to it? Does it sound like that this form of investment does not offer the kind of excitement you would wish for while dealing with money? Maybe it does to a large extent because the word ‘passive’ conveys a lack of interest and perhaps even a hint of laziness, neither of which are ideal in an investment strategy. But exchange traded funds (ETFs) and index funds, which may be the most active and dynamic sector of the financial world, are driven by a passive style of investing. So, what exactly is passive investment? At its most basic, it’s an investment that does away with human intuition when choosing what to acquire and when to possess it.

Investors pool their funds into an ‘active’ mutual fund where the management chooses investments based on their study, instinct and expertise. In a passive fund the components of the fund are decided by an index that is defined by a set of rules. ETFs tend to be passive, but not always. Similar to how stocks are frequently associated with active management, mutual funds can also be passive. Then, what exactly does it mean to have a passive investment? Simply put, passive investing entails owning the market rather than making an effort to outperform it.

Owning the Market with Passive Funds