Passive Investing - Everything You Need to Know

Posted in Investment By Roshani Ballal - Feb 6,2022
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Funds managed actively, dominate the investing world. However, passive investing is something that’s changing the course. Wondering what passive investing means? It is a long haul that involves a long-term strategy to multiply your money over time.   

Let’s take a look at the numbers to understand this better!  

The AUM of passive funds was held at $22 trillion in 2020 as per the BCG report on the global asset mix of mutual funds. The story does not end here. The same is expected to leap higher to $34 trillion in 2025. What’s more eye-catching is that passive investment products recorded the highest growth during the pandemic with a rise in the AUM of 17% globally, according to the BCG report.  

What’s India’s story?  

The AUM of passive funds rose from ₹22,409 crore to ₹3,10,330 crore between March 2016 and March 2021, marking a trend of a shift from active to passive investing in India. * 

Wonder what’s causing this transition?  

According to the data presented in a Finity report, passive investing has gained major popularity driving the AUM growth due to the cost of government policies and the regulations implied by them. Not just this, the underperformance of some active funds has also moved the investors’ interest towards passive investing strategies.  

So how does passive investing help you?  

Let’s find out how passive investing benefits you, despite not being recommended very frequently.  

Low costs:   

With a lower expense ratio, passively managed funds tend to be a light on your pocket. This is possible because funds managers and investment teams have less involvement in the process, thereby reducing the transaction costs and fund management charges.  

Superior returns with long-term strategy:   

Staying invested for the long-term with the passive investing strategy allows investors to earn more on their invested money and create a better investment portfolio.  

Diversification of funds:

Passive investing involves indexing which allows automatic diversification of investment across various sections and companies. Diversifying your investments through passive investing saves you from company-specific and sector-specific downturns, thereby proving beneficial.  

Passive Investing vs. Active Investing: What’s right for you?  

An average investor would go for passive investing given that it helps you generate more returns over long-term investment. You might wonder which one’s the right investment for you. Find out here.  

Preserving your wealth

If you are an investor wanting to maintain your wealth overgrowth, active investing would be your thing! Let’s understand this better with an example. Anil, aged 55, who is close to his retirement now, would choose to opt for an investment that allows him to generate a corpus in a lesser amount of time. Besides, due to the lack of time to recover from losses, Anil would choose a steady stream of income over long-term gains.  

Combining the two strategies  

While you make a choice between active and passive investing, it need not be a mutually exclusive choice either! By incorporating a combined strategy, you don’t just get peace of mind through a passive investing strategy that lets you earn returns gradually, but you can also hedge against the risks with a passively managed portfolio during a favourable market.  

Now that you know how both active and passive investing work, make your pick and start investing!

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