Investment strategies can be classified into two groups: active and passive. Those following the active strategy buy and sell products regularly with an aim to beat the stock market and take full advantage of short-term price fluctuations. A passive strategy takes a long-term approach of buying and holding a diversified mix of assets in a bid to match, not beat, the market. Of late, passive investment has shown promise in India and gaining ground. Despite 2020 being a washout because of the pandemic, passive investing grew both in terms of investor interest and assets under management.
What is passive investing?
Passive investors believe the secret to boosting returns is by trading as little as possible and allowing the market to be the manager of their funds. Passive investors look to gain from the rise in the market over a long period of time, rather than booking profits from short-term fluctuations. Their goal is to build wealth gradually. The most common passive investing approach is to buy index funds tied to the market. The index fund is a portfolio of stocks that mimics a particular index such as the Sensex or Nifty.
Why passive investing?
People can turn to passive investing if they don't want fund managers to look after their investments actively. Passive investing translates to a lower expense ratio as it involves replicating an index. This strategy is also considered safer than active investing, except for a situation when the stock market volatility can affect the investment.
Passive investing works on the principle that the market will eventually rise over time. And since index funds mirror the market, the investment will also appreciate with it.
Key features of passive investment
-- Passive investment incurs a low cost for investors. The transaction cost or commission is low since there isn't frequent trading.
-- It gives investors an efficient way to diversify as index funds spread risk across several products.
-- Diversification almost always brings the level of investment risk.