Investing is one of the most powerful ways of building wealth. Within investing – mutual funds have become the most popular option for investors today.
Benefits of Mutual funds include diversification with professional stock-picking. Mutual funds also take out the habit of regularly monitoring the market and making decisions based on a lot of information. In today’s scenario, investing in mutual funds involves relying on fund managers – which is called active investing.
Passive investing, however, may be worthy of your attention too.
Passive investing involves a long term strategy that consists of letting the broader market or index dictate your returns. Such investing happens via index funds that follow an index (like Sensex, Nifty).
The advantages here are many – from achieving strong diversification to lowering costs, and more – which we’ll discuss later in this post.
As of March 2020, the total value of assets in passive investments passed $5 trillion globally, with the passive investment sector gaining exponential momentum in Indian markets in particular.
As passive investing becomes an increasingly exciting option for many, here are five key things you need to know about passive investing in India:
#1 Passive Investing Is a Simplified Version of Investing
Passive investing is a compelling alternative to the active investing many engage in, by doing away with the need to research and choose between thousands of funds manually. While many active funds have delivered stellar returns, it’s important to take a look at broader trends instead of a few funds that stand out. Take a look at these stats from 2019:
- Over half of large-cap funds failed to beat the returns of their index.
- Index funds beat active funds at returns for the 2nd year in a row in 2019, delivering an average return of 9.6% as compared to 5.7% from active funds.
Obtaining an above average return from active funds involves careful fund selection and research and, therefore, is not as straightforward.
On the other hand, in passive funds, we are assured of returns that will match the benchmark/index (E.g., Nifty, Sensex) they are tracking. Passive funds offer a simpler, low cost and have historically performed well too.
It is why a passive investment strategy seems attractive and something an increasing number of investors turn their sights to, bringing us to the 2nd point of this post.
# 2 India Is Warming Up To Passive Investing
India’s interest in the passive investing sector is on an uphill trajectory, with several new passive funds covering a robust range of indices. Currently, India hosts 86 passive investment options with assets under management (AUM) of about $24 billion, which is reasonably encouraging. Just five years ago, the country had 57 products with only $2 billion in assets.
Remember – passive investing is a long term game that involves investing in an index and reaping eventual gains. It is also a cost-effective alternative.
When it becomes hard to pick the right active funds, passive investing offers multiple benefits to all investors. Here’s how:
The expenses incurred as management fees in passive funds tend to be a lot lower than other funds. There remains no need to hire professional money managers. The strategy is to replicate the returns on the index.
- Relaxed investing:
Investors do not have to fret about identifying the right fund. Choosing between 5000+ active funds out there can be daunting. Passive investors enjoy a relaxed investment experience.
The investor has complete knowledge of the stocks in the index, and the proportion invested in each stock every month. Index investing is, therefore, a much more transparent way of investing.
There are multiple methods of passive investing. However, ETFs and Index funds have emerged as the champions in the passive investing arena. More on them below:
# 3 ETFs and Index Funds
Passive investment can come in via an investment in the following:
Index funds are a specific type of mutual fund with their portfolio constructed to match a standard market index. An index fund replicates your investment right from quantity, stocks, and proportions based on its index. SIPs can be set up easily and quickly with index funds.
The sheer diversification of index funds and their long-term returns, position them as an ideal passive investment medium.
Exchange Traded Funds (ETF)
An ETF is a mutual fund that owes its name to the fact that it trades on an exchange like stocks. Many ETFs track and follow a specific index, like Nifty, or an asset like gold.
An ETF closely matches the constituents of an index or the price of an asset. So investments in an ETF move in the same direction as the index it tracks.
As an example – assume you invest in a Nifty ETF. Your investment in a Nifty ETF would generate the same returns as the Nifty. If Nifty rises by 15% in a year, your Nifty ETF will also deliver 15% returns for the same period.
To invest in EFTs, an investor requires a Demat account.
# 4 Passive Investing Is Recommended By Warren Buffet
In his 2016 Berkshire Hathaway annual shareholder letter, Warren Buffet strongly recommended investing in low-cost index funds. And so do many other seasoned investors. What makes an index fund so popular amongst everyone?
Index funds are an excellent investment strategy for individuals who don’t have time to monitor their investments.
- Index funds have a low expense ratio – the charges paid to fund managers is more economical than almost all other options.
- Index funds allow you to diversify even with low investments and low fees.
- Since a fund manager’s role is minimized right from fund allocation to critical, decisive calls, the index funds are immune to human bias and errors.
Index funds establish themselves as a profitable long-term passive investment method. We now move to a crucial need of the hour question.
# 5 How Can You Join The Passive Investment Wave?
Market experts optimistic about the growth trajectory for the Indian passive market. Early investors have already begun to enjoy big wins since the passive investment wave in India.
So how can you get the best out of this wave?
It’s critical to associate yourself with an experienced team to amplify your returns significantly.
At Glide Invest, we are a team of experts on a mission to empower you to achieve financial independence, via simple, low-cost investment products.
Passive investing in India unfold right before the market’s eyes, with multiple products on the horizon. It becomes crucial to identify and invest in the right ones as per your risk profile while reducing risk via asset allocation. At Glide Invest, we hope to help you make the right financial investments to enhance your financial journey.