Passive funds, such as index funds or equity-oriented ETFs (Exchange Traded Funds) are designed to track the performance of popular market indices or sectors, such as the Nifty 50, S&P BSE Sensex, and Nifty 500. Other than these, there are sector and strategy-oriented passive funds investing in indices such as Nifty Quality Low Volatility 30, Nifty Quality Low Volatility 30, Nifty Low Volatility 50 Index, Nifty100 Quality 30 Index, Nifty Midcap150 Momentum 50 Index, Nifty Midcap150 Quality 50 Index, Nifty Alpha 50 Index, Nifty Financial Services 25/50 Index, Nifty Bank Index, Nifty Private Bank Index, Nifty PSU Bank Index, Nifty Auto Index, Nifty Consumer Durables Index, Nifty India Consumption Index, Nifty Capital Markets, and more.
Unlike actively managed funds, which aim to outperform the market by selecting specific stocks, passive funds simply aim to match the returns of the index they track.
This makes them inherently less active in management, with minimal buying and selling within the portfolio. All they ought to do is simply replicate the respective underlying index they are mandated to follow.
As a result, they are less expensive in terms of their expense ratio compared to actively managed funds. The table below sums up the key differences between the two:
Over the past few years, passive funds have gained significant traction among investors. One of the primary reasons for the increasing interest in passive funds is the ease and convenience and investors are largely satisfied with index returns amidst a time when many actively managed funds have either struggled to consistently outperform the benchmark returns or produce alpha.
In a market where volatility has intensified (owing to geopolitical tensions such as Trump’s protectionist trade policies, domestic economic uncertainties, and inflationary concerns), the underperformance leaves investors wondering whether the higher fees associated with active management are justified.
In contrast, the lower expense ratio of passive funds seems more affordable in an environment where not many active fund managers have been able to outperform the underlying benchmark index.
Passive funds are not subject to stock selection risks associated with a fund manager’s possible behavioural bias or poor judgment. Since all passive funds track a specific index and behave similarly,
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