Passive Funds: What are Passive Mutual Funds, Types & How to Invest

15 Jan 2021|

1 min read |

by ICICI Securities Team

Passive mutual funds are exchange traded funds and funds that invest in index, thereby ensuring stable returns without much risk over the long term. Here’s all you need to know about these funds

What should be the investment strategy for passive funds?

Usually, passive mutual funds involve a buy and hold strategy, thereby minimising the costs associated with active funds, where the fund manager keeps juggling the portfolio depending on the market conditions to ensure a high rate of return. There are several investment strategies used by passive funds, including investing in index funds or exchange traded funds.

Market Alignment, returns rate and risk:

Unlike active funds, where the fund manager aims to beat the market, passive funds are usually aligned with the market, because they invest in market indices like the Nifty or Sensex. This means all the stocks in these indices will find representation in a similar ratio in their investment portfolio. These indexes usually mirror the market, and thus don’t deliver returns higher than markets. But the risks are much lower too, and because most passive fund investments are long term, the returns are compounded over time.

Cautious Investment:

Unlike active funds where the fund manager is constantly monitoring the performance of funds, passive mutual funds involve cautious, premeditated investments, which require very little monitoring. As such, you don’t end up panicking and selling funds when the market fluctuates. These funds are not biased towards any particular stock or sector and are more diversified as compared to active funds.

Low fees:

Apart from low fees, passive funds are usually transparent because they are aligned with an index, which can easily be monitored to see the specific assets involved. Also, because you are not buying and selling regularly, there are no major tax implications each year. However, it has also been argued that by locking investments into a specific fund based on an index, your ability to gain from short term fluctuations are limited. And since the holdings mirror the market, these funds rarely beat the market returns. You make a large profit only if the market booms exponentially. Active funds, on the other hand, are geared to constantly beat the market, albeit with much greater risk exposure.

Essentially, active investing where a fund manager aims to beat the market offers better returns, but at a higher risk. Passive investing is where one buys and holds index funds or other ETFs for a long term, where the wealth is built incrementally as the market grows. Open your trading account to begin investing in either or both today.

Disclaimer

ICICI Securities Limited has its registered office at ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. The non-broking products / services like iLearn and Financial Learning are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism. iLearn is not an exchange traded product/service of ICICI Securities Ltd. All disputes with respect to the activity on the platform would not have access to Exchange investor redressal or Arbitration mechanism.

ICICI Securities Ltd. is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. ICICI Securities Ltd. is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Mr. Atul Agrawal, Contact number: 022-69997051, E-mail address: complianceofficer@icicisecurities.com Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. ICICI Securities Ltd. and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. AMFI Regn. No.: ARN-0845. PFRDA registration numbers: POP no -05092018. ICICI Securities Ltd. acts as a Composite Corporate agent having registration number -CA0113. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund, Corporate Fixed Deposits, Bonds, Alternate investment funds, Tax planning, Succession planning, NPS, IPO, Investment Advisory and Loans related services are not Exchange traded products and ICICI Securities Ltd. is acting as a distributor to solicit these products. Please note, Insurance related services are not Exchange traded products and ICICI Securities Ltd. is acting as a corporate agent to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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