Passive funds, also known as passive investment funds, are investment funds that aim to replicate the performance of a market index, such as the S&P 500 or the NASDAQ, rather than trying to outperform the market through stock selection or market timing.
Passive funds typically invest in a broad range of stocks, bonds, or other securities that make up a particular market index. This means that they generally have lower management fees than actively managed funds, as there is less research and analysis required. As a result, passive funds are often seen as a cost-effective option for investors looking to gain exposure to a specific market or asset class.
There are two main types of passive funds: index funds and exchange-traded funds (ETFs). Index funds are typically bought and sold through a mutual fund company, while ETFs are bought and sold on stock exchanges like individual stocks.
Passive funds like ETFs and index funds invest in a basket of stocks, mutual funds, or an index at a low cost. Thereby freeing you from the hassle of identifying and investing in individual stocks. As the fund manager simply has to replicate the portfolio of the underlying indexes.
Passive investment strategies can be a good choice for long-term investors who are seeking to build wealth over time, and for those who do not have the time or expertise to actively manage their investments.
A NIFTY 50 index fund would invest in the NIFTY 50 constituents in the same proportion as the NIFTY 50 index. The fund manager will have to rebalance the portfolio based on the movement of the NIFTY 50 index.
It is impossible to beat the market continuously, especially in the long run. Hence, constant buying and selling is unnecessary and returns eroding activity. Passive Investing is a strategy that seeks to maximize returns by minimizing trading.
Benefits of investing in Passive funds
1. Cost-efficient
2. Hassle-free and transparent way of investing
3. Auto and timely rebalancing
4. Keeps emotional biases away
5. Option to choose from multiple indices
6. No need to track and research individual stocks
Passive investment strategies can be a good choice for long-term investors who are seeking to build wealth over time, and for those who do not have the time or expertise to actively manage their investments.
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