What is Passive Investing?

What is Passive Investing?

Passive investing defines an investment plan of creating an investment portfolio that has a similar type of composition as an underlying index such as S&P BSE Sensex, NSE Nifty50 or a commodity, like Gold. In case of passive investing, the investors invest to replicate the returns of the underlying index/commodity. Here the investors have the direct exposure to the benchmark and commodities by a single investment product. Examples of these investment products that adopt such an investment plan are Exchange Traded Funds (ETFs) and Index Funds.

Though purchasing and holding onto stocks is not new, passive investing as a strategy first emerged in the 1970s with the creation of the first index fund for individual investors.
It was totally a new type of mutual fund, created in 1976 by John C. Bogle, the then-CEO of The Vanguard Group. Named the Vanguard 500 Index (VFINX), it allowed many investors to purchase shares in a fund that mirrored the S&P 500 - an index widely seen as a stand-in for the stock market overall. It priced cheaper than most of the mutual funds, it allowed "the little guy" to have a stake in some of the market's top companies, without the cost of purchasing them individually, and without so much effort.
All the other companies followed suit in offering index mutual funds. Then, in 1990 there came another creation which is called exchange-traded funds (ETFs). They, too, were designed to track different indexes - and with even much lower management fees than mutual funds. And also greater liquidity, since ETFs trade throughout the day on exchanges, such as stocks themselves.
Very cheap, diversified, and lower-risk, they were made for a buy-and-hold strategy - and vice-versa. It was the advent of ETFs that made passive investing a part of the financial conversation, especially for the retail investors.


The first step to begin your passive fund is researching and finding the correct fund. At this moment there are more than one hundred passive funds in the Indian Stock Market, and you should select the one that suits your investment ambitions and financial setting properly. For example, if you are looking for a sector-based passive fund, you can research the funds based on the sector on sites like grow, zerodha.com, Money Control, or any other kind of platform of your choice.

Invest Offline

If you like the general way of investing, you can go to the fund house with the documents you have and sign up for a SIP or a one-time investment strategy. However, if you need to invest in the offline mode, you need a cancelled cheque, address proof, identity proof, and some photographs.

Invest Through Apps

Today, various applications exist in the Indian market that make investing easier in the passive market. In the starting, you have to install the app and look for the correct passive fund which is worthy of your investment. Once youve finalized the app then look out for the passive fund, your investment is just a few buttons clicks away.
Investing through apps is a much better idea, as you can track your investments very fast. Moreover, these type of apps dont charge any money to manage your investment relationship with the fund house, so it is much cheaper to invest through apps.

Advantages of Passive Investing

Lower Costs - Passively managed investment products such as ETFs, index funds etc. tend to have much lower expense ratios when compared to actively managed funds. This happens because the investment team has an almost negligible role to play in terms of selecting stocks and determining investment timing considering the requirement of only tracking the changes in the composition of the benchmark. Consequently, the fund management charges and transaction costs are very low, thereby it results in lower costs for the investors.
Diversification - Since the benchmark indices are built to have an overall market representation, comprising of various sectors and segments of the market, investing with a passive investment plan passes the same advantages of diversification across the market segments through a single investment product.
Elimination of unsystematic risk - Systematic risk is mainly the risk of market movements due to changes in the macroeconomic indicators like economic growth, current account deficit, etc. Unsystematic risk indicates the risk other than the systematic risk. In other words, it is the risk of selection of incorrect investment products or improper timing of investments in the mutual fund. Since the passive investment plan does not render such flexibility to the fund managers, those risks stand mitigated for the investors.

While passive investing has many benefits, it has its drawbacks too.

Live by the benchmark, die by the benchmark: Index funds follow their benchmark index regardless of which state the market is at that moment. Translation: They'll automatically increase when the indexes are performing well, and they'll also drop when prices decrease. And if the market goes into freefall...

Lack of flexibility: Even if index fund managers foresee a decline in their benchmark's performance, they normally dont take such steps as cutting back on the number of shares they own or taking a defensive, counterbalancing position in other securities.

Fewer windfalls: As passive funds are created to mirror the market, investors are unlikely to experience the big coups that actively managed funds can sometimes provide. No catch that rising stock star, in other words. Even if a fund did, it might not give advantages as much, as the returns would be mitigated by the other holdings in the portfolio.

Less pain but less gain: Purchasing and holding can be a great strategy in the long run (at least a decade or two). You weather the market volatility. But getting out from the risks also flattens out the rewards. In shorter time spans, active investing generally provides better results and juicier gains.

Hope you are now familiar with what is passive investing, its history, how to invest in it and its advantage and disadvantages.
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