The Signal: Statue & Stealth – The Two Perceptive Pillars Of Passive Investing - fisdom

The Signal: Statue & Stealth – The Two Perceptive Pillars Of Passive Investing

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The signal

Active Vs Passive – A Distinction Without A Difference

For as long as there has been investing, there has been an active debate about “Active vs Passive” philosophy. Each style has found its suitors, often citing, and sitting on opposite ends of the same reasoning spectrums. But what if there is no difference? 

  1. Active, by definition, means responsive. Hence, active investing translates to pro-movement investing, where ‘Go’ is preferred over ‘Stop’. It is deemed suitable for those who think “action yields better results than inaction”
  2. Passive, by definition, means unresponsive. Hence, passive investing translates to sans-movement investing, where ‘Stop’ is preferred over ‘Go’. It is deemed suitable for those who think “inaction yields better results than action”.

On the offset, the 2 approaches scream antonymous, but are in fact, synonymous. Being the same side of the same coin, Passive is more definitive and derivative of Active, than distinctive. 

“Doing Nothing is still doing something” – This succinct 6-word phrase defines why passive isn’t passive but is instead a subtle mirroring of an active approach. 

Earlier this week, passive industry breached old milestones, setting new all-time high flow figures:

1. Overall industry AUM grew 97% on an annual basis, expanding from Rs 7,032 crore to Rs 2.07 lakh crore in the last 5 years 

2. The Nifty 50-tracking ETFs (passive market value) crossed Rs.1 Lakh crore, expanding ~30X in the last 5 years

    • It makes up 50% of the entire corpus of the ETF industry!

3. Employees’ Provident Fund Organization (EPFO) too takes a big bite of the passive industry flavored cake 

    • Invests 15% of its accruals in ETFs, making them one of the biggest believers of passive investing
    • Since 2015, it has invested Rs 1.03 lakh crore in the Nifty 50 and S&P BSE Sensex ETF!

With active investing finding criticism amidst this viral virus, the passive industry has grown multi-fold on the back of blind-minded investors. In a mastered mime act, passive investing is as much passive, as the color Black is the “Darkest White”. Here’s why!

The evidence lies in its supposed to be “No-Churn” stance. Passive theory calls for a freeze zone in investment underlying, but in practice, plays a different tune as shown below:


As can observed, India’s primary avenue for passive investors, the Nifty 50, has been subject to the kind cruelty of the surgeon’s knife. 

1. Nifty, in its effort to best represent the economy, is a visual example of a self-sustaining system. Tweaking its structure via exits and entrants, the index will always be dynamical. Hence, index investing will never truly be passive, but be pseudo-active.

2. In fact, Nifty typically churns by 40% over a ten-year period implying that 20 current Nifty stocks will say their goodbyes, making room for an equal number of new stocks.

3. 10 years ago, 2/3rd of Nifty was composed of balance sheet heavy sectors like Power, Construction, Metals, Telecom, Real Estate and Oil & Gas.

It is clear from our charts and bullets that for as long as there will be passive investing, it will not be passive investing. Making India’s most actively traded index as its benchmark should have been our 1st takeaway.

Investor Takeaway

So, is Passive investing the greatest marketing ploy of all time? Probably. Probably Not. What we take away from this piece is that “passive” investing will continue to be relevant, keeping investor interests in mind.  

“Change is the only constant” is the ideal motto for passive investors. And in changing, it will continue to deliver returns. For if it doesn’t give, that means the country’s markets are not giving. 

“Passive” investors believe, the market by itself is an opportunity, whereas active investors hunt for opportunities within this bigger opportunity. The table below shows how minimal activity-&-volatility play can yields returns too:

Investors takeaway

As can be seen, self-inaction + market-action = today’s passive investor.

‘Passive’ (if we can still call it that) has and will always have favouritism in the long-sighted investors who wish be part of the monetary food-chain of: “Country –> Markets –> Self”

For those wishing to make bank on markets’ purported inefficiencies, should lean to active investments, which fyi, draws ideas and frameworks from the steam of all things passive.

Today, as markets and funds toil and turmoil with branding issues, it should ideally be ‘Passive’ investing which should become the brand ambassador for a “True-to-Label” Calling!

If you harbour different opinions, do write to us. We at Fisdom, look as much to serve as to listen. For if we listen well, can we serve well. Thank you 

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