A passive fund is a type of fund that religiously tracks a market index to allow a fund to fetch maximum gains. The fund manager does not actively choose what stocks the fund will be composed of, which is the case in an active fund. This usually makes passive funds easier to invest in than active funds. Also, index funds are a good way for a ‘know-nothing’ investor because you do not need to research and know about the best performing fund. Passive funds do not involve the active participation of a fund manager. Hence their fee is far less as compared to that charged by an actively managed fund. The reason for passive funds to gain popularity among investors in India recently is their low expense ratio. The involvement of a fund manager in an index fund is comparatively less. That’s because index funds mimic the indices.
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A passive fund is a type of fund that religiously tracks a market index to allow a fund to fetch maximum gains
What is a passive fund?
Pros & Cons of Passive Fund
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Benefits of passive funds:
Ultra-low fees: There’s nobody picking stocks, so oversight is much less expensive. Passive funds follow the index they use as their benchmark.
Transparency: It’s always clear which assets are in an index fund.
Tax efficiency: Their buy-and-hold strategy doesn’t typically result in a massive capital gains tax for the year.
Simplicity: Owning an index, or group of indices is far easier to implement and comprehend than a dynamic strategy that requires constant research and adjustment.
One of the safest funds that provide a reasonable rate of return
Invests in different asset classes for a diversified portfolio
Debt fund that invest in government securities
Fund that primarily invests in stocks
While passive investing can be a very good investment strategy for maximizing your returns with minimal trading, it has its own pros and cons as well. Therefore, it is not necessary that it will be fit for your investing style. It is better to have an in-depth knowledge about your investment style before opting for any investment strategy. In case you are confused, you should opt for the services of a SEBI registered investment advisor who will analyze a number of parameters to find your investment style and also get your risk appetite by conducting your risk profile analysis. They will then suggest the best investment strategy for your needs based on all the pointers. One should always remember that the markets are full of risks and one should not step in any investment strategy or trading without proper knowledge and research.
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