- Date : 29/08/2023
- Read: 3 mins
Passive MFs offer cost-effective diversification and exposure, closely tracking market indexes. Choose large-cap options, prioritise low-expense ratios, and account for tracking errors for optimal portfolio construction.
Elevate your mutual fund mix by adding passive index funds. They're budget-friendly, low-maintenance, and offer the vital diversification and exposure your portfolio craves.
Targeting major market indices like NIFTY and SENSEX, these passive index funds mimic their composition effortlessly. The beauty of their simplicity lies in needing minimal market research or adjustments by fund managers – hence the name "passive" index funds.
Highlights:
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Passive funds diversify an investment portfolio with minimum required cost and effort.
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Passive index funds track the underlying stocks of the market indexes they imitate with little interference from a fund manager.
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Choose passive index funds that invest in a broad spectrum of stocks across the market and come with less expense ratio and fewer tracking errors.
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Passive indexes are less flexible in scope and cannot outperform market conditions.
How to Build a Passive Funds Portfolio
Choice of Passive Investments
For passive index fund investing, it is better to go for large-cap market indexes such as NIFTY50, NIFTY NEXT 50, or broad indexes such as NIFTY 500.
Mid- and small-cap indexes don’t necessarily present the broader market picture, and you have to earn returns tactically. For small caps, restrict your portfolio allocation to less than a quarter of your equity portfolio.
Factor in Expense Ratio
Index mutual funds boast a lower expense ratio since they require no active management by a fund manager. Given the limitations of passive funds to outperform their tracked indexes, prioritise funds offering superior net returns and a reduced expense ratio.
Also Read: What's the difference between actively and passively managed funds
Tracking Errors Matter
Most index MFs are benchmark indexes that replicate the broader market. When you invest in one, you are exposed to a wide range of stocks representing the stock market at large in the auto mode. However, there may be times when your index fund may lag behind, which results in tracking errors. In that case, choose the one with the least tracking errors.
Conclusion: Should You Invest in Passive Funds?
To sum up, passive funds include mutual funds and Exchange-Traded Funds (ETFs), known for being transparent and easy to trade. You can monitor their underlying assets and buy or sell them during trading hours, providing convenient access.
Also Read: ETF vs index funds: Which one should you invest in?
However, keep in mind that passive mutual funds can't adjust their allocation when underlying assets perform poorly. Despite this, these passive funds offer a way to achieve considerable returns with minimal effort and costs, serving as valuable pieces to complete your active-passive investment or mutual fund portfolios.
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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
