Passive investing
Updated on March 14, 2023
Passive investing is the strategy of investing where the money accumulated by investors is used to buy the ‘whole market’ or the entire ‘index’. A ‘passive investment strategy’ mimics its benchmark index and thus ‘passive investing’ is also called ‘index investing’. A Fund Manager or team will have a minimal role in passive investing and thus the cost of investing is also very low. By investing passively, investors are automatically invested in the stocks or securities that are part of that index.
Types of Passive Investments
Broadly there are three types of passive investments:
1 Index funds
2 ETF (Exchange Traded Fund)
3 Fund of Funds (FoFs)
Benefits of Passive Investing
Some benefits of Passive investing are:
a) Reduced cost
Passively managed investment products have lower expense ratios because the fund manager or fund team has little role in the selection of stocks or securities and there are no fund management or related charges.
b) Transparency
Transparency is a key characteristic of major benchmarks -Investors can easily track changes or updates in the index as well as the fund.
c) Diversification
Passive investment strategy provides the benefits of diversification across different segments of the market through a single investment product.
d) Higher Returns
The low cost of passive investments is beneficial to investors in the long run.
e) Low risk
Active funds carry the risk of picking the wrong stock/company, but in a passive fund or strategy, these types of risks are minimized for investors.
