Mutual Fund Investment: Know Passive Mutual Fund, know why investing in it is a profitable deal
New Delhi
In the changing times, the methods of investment are also changing. Similarly, the investment preferences of investors are also changing. That is why, at present, passive funds are fast emerging as the preferred investment product by long-term investors. It gives market based profit without the hassle of trading the markets again and again. Apart from the low cost, it also helps in reducing the cost in the form of brokerage and taxes due to the relatively high turnover.
What is Passive Mutual Fund?
As the name suggests, these funds follow a passive strategy of investing. That is, they invest only in indices. Their portfolio reflects the components of the index in the exact proportion in which they are in the index. The idea behind this type of investment strategy is that it is not theoretically possible to consistently outperform the market in terms of long-term performance. Therefore, it makes sense to sit comfortably by investing in the index. The broad gains in the market are reflected in the index. In short words, it is passive strategy to earn money from stock market.
Where did it start?
The first mention of the introduction of passive funds begins with America. America’s passive fund experience is very valuable from India’s perspective. Vanguard Asset Management Firm launched the first passive fund in 1976. The passive fund category has been well accepted by investors and is currently estimated to account for over 50 per cent of the US mutual fund industry’s AUM (Asset Under Management). Given the encouraging performance of passive funds in the US, we are confident that India will also experience a remarkable journey of passive investing.
What are the charges for investing in Passive Mutual Funds?
Cost matters to long-term investors. There is no active fund management team involved for stock selection and hence the apparent cost is very low. Passive funds follow the index used as the benchmark. Passive fund has the lowest expense ratio among various mutual fund products.
What are passive mutual funds, why is investing in it a profitable deal?
Passive Mutual Funds: Mutual funds are launching a large number of passive funds. This has helped them to expand their product range. Fund houses are marketing these as a multi asset allocation solution.
Passive funds are fast emerging as the preferred investment product by long term investors. It gives market based leverage without the hassle of trading the markets again and again. Apart from the low cost, it also helps in reducing the cost in the form of brokerage and taxes due to relatively high turnover.
Benefits of investing in passive funds
(i) Low Charges:- Cost matters for long term investors. There is no active fund management team involved for stock selection and hence the apparent cost is very low.
Passive funds follow the index used as the benchmark. Passive fund has the lowest expense ratio among various mutual fund products.
Currently, Navi’s Nifty 50 Index Fund has the lowest expense ratio of 0.06%. This is the lowest in the mutual fund industry till the date the article was published today.
In comparison, the mutual fund industry average is close to 0.25%. Savings for Investors with Low Expense Ratio For example, consider two early stage investors who start SIP (of the same amount) at the age of 25 and continue investing till retirement (age 65). .
Assuming that one invests in an active fund and the other in a passive fund, a net additional cost of 2% will be borne by the active fund holder.
As a result, a passive investor’s total amount will be 2.5 times higher (assuming an annual growth rate of 12%) over a period of 40 years (or 1.5 times over a period of 30 years).
(ii) Transparency– This is a standardized product. It is always clear which asset is in the index fund.
(iii) Simplicity– Ease is required in every portfolio. We believe that the strategies and philosophies of different funds work differently in different market conditions.
(iv) Risk– Passive funds carry only market risk whereas actively managed funds are also subject to the cost of the fund manager’s stock selection call.
America’s passive fund experience is very valuable from India’s perspective. Vanguard Asset Management Firm launched the first passive fund in 1976.
The passive fund category has been well accepted by the investor and is currently estimated to account for more than 50% of the AUM (Asset Under Management) of the US mutual fund industry.
Given the encouraging performance of passive funds in the US, we are confident that India will also experience a remarkable journey of passive investing.
Passive products have started gaining momentum in India. The total AUM of passive funds in India stands at 10% of the total mutual fund AUM by the end of May’2021.
Also, the Passive Fund AUM has increased by 13 times (in the last 5 years) to Rs 3.24 lakh crore by the end of May 2021. The total mutual fund industry has grown almost 3 times to Rs 33.05 lakh crore during the period up to the end of May 2021.
