Before talking about Passive Investing, let’s meet Atul. Atul M (35 years) is a proponent of FIRE — financial independence and early retirement, a concept he learned on social media during the COVID-19 pandemic. Many more millennials like Atul are prioritizing savings that will help them accumulate wealth so that they can retire in their 40s, much before the conventional age of 60 years.
Atul has always been good at saving, but his investments have mainly focused on bank deposits. During the pandemic, the euphoria around the stock market pushed him to invest in markets. Atul is not a high-risk taker, that is why he chose mutual funds and set-up three SIPs to build his retirement portfolio. In the last two years, he has increased MF investments into index funds based on Nifty 50 and Nifty Large Cap index because he does not want to take too much risk.
This suggests that Atul is following a passive style of investing to build a retirement corpus. More on this later.
What’s a retirement corpus?
Retirement corpus is money accumulated by individuals that will help them meet their expenses for essentials and leisure after retirement or when salary stops getting credited into the account.
The targeted corpus depends on your goals – travel, buying a house, etc. But remember the beast called inflation that erodes the value of money over a period of time.
Specifically, there are high chances of dependency on medical services in the retirement age, and the cost of medicine and doctor visits is definitely rising. If inflation is not accounted for in retirement planning, the money saved may be just enough to cover monthly expenses and not your dream Europe vacation, for example. Similarly, investing in risky financial products for building a retirement fund may lead to losses.
Interested to invest in index funds? Start here.
Enter index funds.
Nonagenarian Warren Buffett, among the world’s most successful investors, is a great advocate of index funds.
“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb,”
Buffett, popularly known as the Oracle of Omaha, had said this in 1993.
Index funds are mutual funds based on popular indices such as Nifty 50, Nifty Largecap, Nifty Midcap 100, Nifty small cap 250. Essentially, the investment is done mimicking the index, which means that it will buy stocks in the same proportion as represented in the underlying index. For example, the Nifty 50 index fund will buy 50 stocks according to their weightage in the index.
This style of investment is called passive investing. There is increasing awareness about stock markets and mutual funds, leading to the concept of passive investment gaining popularity among investors like Atul.
Just like index funds, exchange-traded-funds or ETFs is another passive style of investments. ETFs are similar to index funds with only difference that they trade on exchanges like stocks of the company. The aim is here to replicate the performance of an index rather than beat it.
Index funds are low-cost funds. In passive investing, the fund manager merely mimics the index and hence the management fee and operating expenses are low compared to actively managed mutual funds. At the same time, they are given exposure to diversified sets of stocks, while also giving better and inflation-beating returns.
For instance, if you invest in a Nifty 50 based index fund, you will get exposure to India’s leading 50 companies across sectors such as banks, manufacturing, pharmaceuticals, IT, etc.
Top Index Funds on Kuvera
If you are ready to start passive investing, here are the top index funds on Kuvera, sorted by returns in the last 3 years. Remember, past performance is not an indicator of future returns. *Data as on 23 April 2024.
| Top Index Funds on Kuvera by 3Y returns* | 3Y | TER |
| Motilal Oswal Nifty Smallcap 250 Index Growth Direct Plan | 30.06% | 0.36% |
| Nippon India Nifty Smallcap 250 Index Growth Direct Plan | 29.94% | 0.32% |
| Aditya Birla Sun Life Nifty Midcap 150 Index Growth Direct Plan | 27.81% | 0.44% |
| Motilal Oswal Nifty Midcap 150 Index Growth Direct Plan | 27.74% | 0.30% |
| Nippon India Nifty Midcap 150 Index Growth Direct Plan | 27.48% | 0.30% |
| UTI Nifty200 Momentum 30 Index Growth Direct Plan | 25.55% | 0.46% |
| Aditya Birla Sun Life Nifty Smallcap 50 Index Growth Direct Plan | 23.26% | 0.50% |
| Kotak Nifty Next 50 Index Growth Direct Plan | 23.06% | 0.34% |
| DSP Nifty Next 50 Index Growth Direct Plan | 22.96% | 0.30% |
| IDBI Nifty Next 50 Index Growth Direct Plan | 22.90% | 0.32% |
So what makes passive investment suitable?
Remember that after retirement, there is no monthly salary. So whatever you build has to take care of monthly expenses. At the same time, you need money for leisure activity and to meet your desired goals.
This means two things: better returns that will not just beat inflation but also provide returns better than other financial products, and protect the corpus. For these two main reasons, passive investing is suitable for building a retirement fund.
Easy to understand
Stock indices serve as a barometer for the stock market and by extension the economy. Sectoral indices work as yardsticks for a particular sector.
Typically, leading companies in the economy and of a particular sector are part of the indices. Over the years, the mutual fund industry has grown by leaps and bounds. With that, the number of schemes has also grown. Investors tend to get confused about which MF scheme to select.
Index funds and ETFs are fairly easy to understand as they mimic the index. At the same time, passive investment in mutual funds is low-cost because of lower total expense ratio.
The average retail investor goes by the historical returns to select a fund. But most of the time, he overlooks the associated cost like total expense ratio that could impact the returns. Index funds are low-cost, which in turn boosts your returns. And boost it significantly over a long time horizon.
In a nutshell, for retail persons, passive investment could be equivalent to DIY investment (do-it-yourself).
Better returns
Within mutual funds, passive funds like index funds are better because of their low-cost nature.
Despite charging higher management fees, a number of studies have shown that most active funds, where investors pay to fund managers for his/her stock picking skills, have underperformed benchmark indices.
According to a highly regarded S&P Indices Versus Active Funds (SPIVA) report, in 2023, 52% of actively managed funds underperformed the S&P BSE 100. The underperformance rates were significantly high over the three- and five-year periods but produced relatively better results over the 10-year period.
Safety
Index funds replicate a particular market index.
Typically, well-known companies from various sectors along with stable financial performance and high corporate governance are part of such indices. Diversification helps in cutting unnecessary risks associated with investing in a particular company.
Conclusion
Coming back to Atul.
Just like him, you too can build a retirement corpus by following passive investment strategy. But before that determine the size of the corpus based on your goals, retirement age, desired lifestyle, and estimated expenses.
Once that is done, simply start with index funds. Starting mutual fund investments is really quite simple on Kuvera.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch here: Understanding Index Funds | Expert Insights for Smart Investing
Start investing through a platform that brings goal planning and investing to your fingertips. Visit kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
