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Business News/ Mutual Funds / Your Questions Answered: I am working with an MNC and want to invest in passive mutual funds. Please elaborate on it
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Your Questions Answered: I am working with an MNC and want to invest in passive mutual funds. Please elaborate on it

Passive mutual funds are gaining popularity for their cost efficiency and transparency. They track benchmark indices like the Nifty 50 and the S&P BSE Sensex, providing diversified exposure with lower management fees.

Passive mutual funds track benchmark indices, offering diversification with lower fees. Premium
Passive mutual funds track benchmark indices, offering diversification with lower fees.

Q. I am a fresher working with an MNC as an accounts executive. My family has been investing in gold and fixed deposits traditionally. Most of my colleagues in the office invest in mutual funds and have suggested that I should explore passive mutual funds. Can you please elaborate on what passive mutual funds are and the benefits of investing in passive mutual funds? 

Arundhati Ghorpode, Pune, Maharashtra

In the landscape of investment, mutual funds in India have witnessed a paradigm shift with the burgeoning popularity of passive funds. Passive mutual funds, characterised by their strategy to track and replicate the performance of a benchmark index, have become a cornerstone for investors seeking diversified exposure with lower management fees.

Passive mutual funds

Passive mutual funds are designed to mirror the components and performance of a predefined index such as the Nifty 50 or the S&P BSE Sensex. Unlike active funds, where fund managers make decisions to buy or sell assets to outperform the market, passive funds aim for market-matching returns. This approach minimises the costs associated with frequent trading and active management, making passive funds a cost-effective option for investors.

Also Read: Passive mutual fund assets spike 31% to 8.74­ lakh crore in a year, says report

The growth trajectory in India

The Indian mutual fund industry has seen a significant uptick in the adoption of passive funds. This can be attributed to the increased awareness and understanding of the benefits of index investing. Moreover, the historical data indicating that a majority of active funds struggle to beat their benchmarks consistently over the long term has strengthened the case for passive funds.

Which indices do passive mutual funds follow? 

There are more than 50 indices in India, however, most passive funds in India follow S&P BSE Sensex or the NSE Nifty 50. These indices are not just numbers on a screen; they are a reflection of the Indian economy's health and are closely followed by investors, analysts, and policymakers alike. The Sensex, short for the Stock Exchange Sensitive Index, is the older of the two, established in 1986, and comprises 30 of the largest and most actively traded stocks on the Bombay Stock Exchange (BSE). It serves as a barometer for the overall performance of the Indian stock markets. 

The Nifty 50, on the other hand, was introduced later in 1996 and represents 50 diverse stocks from the National Stock Exchange (NSE), offering a broader perspective of the Indian corporate sector.

Both indices are calculated using the free-float market capitalization method, which considers only the shares available for public trading, excluding promoter-held shares. This method provides a more accurate reflection of market movements as it is based on the actual liquidity of shares.

Also Read: Mutual Funds: 4 key factors to look at before deciding to invest in index funds

Advantages of passive funds

Cost efficiency: With no active management involved, passive funds typically have a lower expense ratio, which translates to higher net returns for investors.

Diversification: Passive funds offer instant diversification by holding all or a representative sample of the securities in the index they track.

Transparency: The holdings of passive funds are a direct reflection of the index, providing clear visibility into where the invested funds are allocated.

Lower turnover: Passive funds have lower portfolio turnover, leading to fewer capital gains distributions and thus a more tax-efficient investment.

Simplicity: Passive funds offer a straightforward investment approach without the need for complex strategies.

Also Read: What is the difference between active and index large cap mutual funds?

Outlook

The future of passive mutual funds in India looks promising. With the regulatory body, SEBI, pushing for greater transparency and investor-friendly measures, the environment is ripe for growth in passive investing. Moreover, as the market matures and investors become more sophisticated, the shift towards cost-effective and transparent investment options is likely to accelerate.

Who should invest in passive mutual funds?

Investing in passive mutual funds can be a smart move for those who prefer a hands-off approach to investing, but it is important to conduct thorough research and consider all factors before making an investment decision. The Indian mutual fund industry continues to grow, and passive funds are an integral part of this growth story, offering a viable option for investors in the diverse market landscape.

In conclusion, passive mutual funds represent a pivotal development in the Indian investment domain, offering a pragmatic choice for those looking to participate in the market's growth without the high costs and risks associated with active management. As the financial landscape evolves, passive funds are poised to play an increasingly significant role in the portfolios of Indian investors. 

For anyone considering passive mutual funds, it is crucial to conduct thorough research and align your investment choices with your financial goals and risk tolerance. Passive investing is not a one-size-fits-all solution, but it certainly is a compelling option that warrants consideration in the diverse world of mutual fund investing.

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

Kuvera is a free direct mutual fund investing platform.

 

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Published: 05 Apr 2024, 09:47 AM IST
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