Passive mutual funds are rapidly gaining traction in India, primarily due to their cost-effectiveness and simplicity. Recent data indicates that the assets under management (AUM) for passive funds have surged to over Rs 10 lakh crore, capturing nearly 17% of the market share. These funds aim to achieve potential gains by tracking the performance of a specific index.

What are passive funds?

Passive mutual funds are structured to replicate the performance of a specific market index, such as the Nifty 50 or Sensex. These funds hold the same stocks in nearly the same proportions as the selected index to mirror its performance. Fund managers of passive mutual funds do not actively research or select stocks for the portfolio. Instead, they aim to mimic the index’s performance by investing in the same stocks.

How does a passive fund work?

Passive funds are managed with a strategy that involves selecting a market index and creating a portfolio that replicates it by investing in the same stocks in similar proportions. The fund manager continuously tracks and monitors the index for any changes, adjusting the portfolio accordingly to ensure it remains closely aligned with the index.

Key Features of Passive Mutual Funds

1. Low Cost: Passive funds have lower management fees compared to active funds because they don’t require extensive research and stock selection.
2. Diversification: By investing in an index, these funds provide broad market exposure, reducing the risk associated with individual stocks.
3. Transparency: Holdings are usually disclosed regularly, making it easy for investors to see what they own.
4. Performance: The goal is to match the index’s performance, providing steady returns that reflect the overall market.

Why Choose Passive Funds?

• Cost Efficiency: Lower expense ratios make them an attractive option for cost-conscious investors.
• Market Matching Returns: Ideal for investors who are satisfied with returns that mirror the market.
• Ease of Investment: Suitable for those who prefer a hands-off approach to investing.

Types of passive funds:

Passive funds can be broadly categorized into equity or debt, but they mainly fall into the following types. Each type offers unique benefits and can be a valuable addition to a diversified investment portfolio:

1. Index Funds: These mutual funds track a specific index. Index funds construct their investment portfolios using a market index as a reference. The performance of an index fund relies on the performance of the chosen index, investing in similar proportions. This enables investors to access a wide range of the market without the need to purchase individual stocks.