How Passive Funds Can Complement Your Active Portfolio

Investors are increasingly becoming interested in passive funds. Passive funds now account for 17% of the total AUM (assets under management)1 of all types of mutual funds in India. Passive funds can be a suitable tool to creating a well-balanced portfolio. Let’s understand passive investing and the role it can play in your portfolio.

Understanding Passive Funds

Passive funds are mutual funds that are not actively managed by a fund manager. The goal of a passive fund is to replicate the composition and performance of a benchmark index subject to tracking error.

For example, a Nifty50 passive fund will aim to mimic the performance of the Nifty 50 index by investing in the same stocks with the same weightage as tracked by the Nifty 50 index. Hence, the fund manager does not decide which stocks to invest in and how much to invest. This makes passive investing relatively straightforward and true-to-label.

Various passive funds exist in the market which track the performance of different indices. A passive fund can be offered as an index fund or an exchange-traded fund (ETF). Earlier, very few varieties of passive funds were offered usually tracking the Nifty 50 or the Sensex.

Nowadays, we have a wide variety of passive funds to choose from that track various segments of the market (such as consumption or manufacturing) as well as various factors of investing (such as value or momentum).

Why Invest in Passive Funds?

Investors may choose to invest in passive funds for a variety of reasons.

• Relatively Lower Expense Ratio – Investing in a passive fund costs less than investing in an active fund. This is because passive funds are less resource-intensive to manage as the underlying benchmark can be replicated without stock selection by the fund manager.
• Ease of Investing and Simplicity – Investing in passive funds can be simpler than choosing individual stocks or investing in individual stocks of an index.
• Greater Diversification – A passive fund aims to mimic a broad market index. This usually means that passive funds invest in a relatively larger basket of stocks. For example, a Nifty 50 index fund will invest in 50 stocks. This can provide higher levels of diversification.

How to Combine Passive Funds and Active Funds?

Investors can choose to invest in both passive funds and active funds as part of a holistic investing strategy.
Passive funds within a portfolio can help investors diversify their portfolios at a relatively lower expense. Investors can aim for potential capital appreciation from market-linked returns without the need to closely monitor portfolio changes within the fund.

Conclusion

Passive funds are gaining popularity as they provide a relatively low-cost and an easy way for investors to participate in the market. New investors can potentially benefit from a passive diversified strategy, which can be implemented without much research and expertise.

1. https://economictimes.indiatimes.com/mf/mf-news/passive-investing-booms-mutual-funds-cross-rs-10-lakh-crore-aum/articleshow/112687323.cms?from=mdr

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.