Mutual funds can seem overwhelming if you are new to investing, but they can generally be divided into two categories: active funds and passive funds. Both active and passive funds have their own unique benefits and can complement each other in a well-rounded portfolio. Active funds tend to be more popular. However, passive funds may also offer an alternative for building wealth.
In this blog, weโll dive into the world of passive funds, exploring what they are and why they might be worth considering.
Passive funds are mutual funds that follow a market index, like the Sensex or Nifty. These funds invest in the same stocks and in the same proportions as the indices they track.
The big difference with passive funds is that the fund manager doesnโt have to pick and choose which stocks to invest in. Instead, they simply copy / replicate an index. For example, if a passive fund is tracking the Nifty 50 index, it will invest in the stocks of the 50 companies that make up that index in the same proportion.
Passive funds come with several benefits that make them appealing to investors. Letโs break them down:
Whether you decide to invest in active or passive funds depends on your financial goals, risk appetite, and investment timeline. If youโre new to investing and feel overwhelmed, consider passive funds as a simpler, lower-risk option. You may consider consulting a mutual fund distributor to find the right fit for you.
Disclaimers:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Do you prefer a simple approach to investing? If yes, passive mutual funds are good to explore. These funds replicate an index or follows an index composition and hence try to mirror the index returns. That is why they are called passive funds. These are simple to understand and do not need constant supervision like an active fund.
In this blog, weโll go over a checklist to help you get the most out of your passive investments.
When investing in passive mutual funds, it's important to think about your goals, risk tolerance, and how long you want to invest. Here are some strategies that may effectively help you enhance your investment outcomes:
Before you invest, decide what youโre saving for. Are you planning for retirement, growing your wealth, or saving for your child's education? Clear goals will help you determine your time period and the risk you could take respective to that goal money. This will help you choose the relevant passive fund.
Diversification means spreading your investments across different asset types, sectors, and market caps. Passive mutual funds could help you do this. Depending on your investment objective you could choose the respective index based passive fund. By diversifying, you manage and optimise the risk and increase the potential for your portfolio performance.
Understanding your risk tolerance is crucial. Some passive funds, depending on the index composition, may provide moderate returns, while others might be more volatile. Select funds that align with your comfort level and ensure they do not jeopardize your financial goals
Passive investing is effective over a long period. Stick to your plan and avoid reacting to short-term market changes. Keeping a long-term mindset will help you ride out market ups and downs.
Check your investments regularly to ensure they still align with your goals and risk tolerance. If needed, rebalance your portfolio to maintain the right mix of assets and risk. This could help optimize your returns.
Passive mutual funds are becoming increasingly popular in India. They let you benefit from market growth without the need for constantly monitoring the market, by simply following the respective index with an aim to mirror the performance of a benchmark index. To make better investment choices, it's important to understand the structure of different types of passive fundsโlike index funds, ETFs, and fund of fund.
By setting clear goals, diversifying your portfolio, knowing your risk tolerance, and keeping a long-term perspective, you could build a passive investment strategy that helps you achieve your financial goals.
Disclaimers:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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