Investing in passive funds is convenient for investors who want keep their equity investment life simple. In this article, we will tell which category of investors should invest in passive funds.
Simple investment for busy people
Many investors do not have time to do research about investments. Simply because they do not like to keep track of their investment portfolio even with the help of their MFDs/advisors. For such investors, passive investing is a suitable option, as they offer a simple way to invest with minimum research.
Fund managers risk
In active schemes, fund managers are free to pick stocks that can bring high returns. This looks great when the fund managers get it right but terrible when they are wrong.
With passive investing, there is no such risk. But that does not mean index funds carry the same set of stocks all the time. The index actually rebalances itself every three to six months. This means, investors can be sure to always hold the best possible companies. In fact, such rebalancing ensures that passive funds are able to get the stocks that are doing well early on, while making sure that poor performing stocks get less significance.
Further, passive funds eliminate the risk of selecting the appropriate investment style of fund managers. For instance, an investor need not worry if his fund is following momentum strategy or value strategy. If the investor wants to bet on the biggest companies in India, he can simply invest in a fund that tracks Nifty 50 or Sensex.
Cost conscious investors
One of the major benefits of passive funds is that they have a lower expense ratio as compared to actively managed funds; this results in lower costs for the investors. The difference in expense ratios of active and passive funds could go as high as 1-1.5%, as the fund management charges and transaction costs are minimal in passive strategies.
Who should look at passive funds?
- Investors who want to keep their investing life simple
- Investors who don’t want to take risk related to selection of stocks and fund managers
- Investors who are cost conscious
