Myth vs. Reality: Common Misconceptions About Passive Funds

Passive funds are quickly gaining in popularity in India and around the world. Today, passive funds account for 17% of the total AUM of the mutual fund industry. Moroever, the AUM of passive funds increased 22% compared to the previous year as of March 2025.

This shows that passive funds are increasingly coming under the radar of investors. But many don’t have a complete understanding of such funds. There are numerous myths about passive funds that circulate in the market.

In this article, we will debunk the common passive fund myths to help educated investors make informed choices about passive funds in India.

What are Passive Funds?
Passive funds aim to replicate the performance of a market index. For example, a Nifty 50 index fund will aim to deliver the same performance as the Nifty 50 Index by investing in the same constituents as the index.

There are a few key benefits of passive fund investing such as lower cost because of the lower expense ratio for passive funds, built-in diversification as an index tracks several securities, and elimination of biases of a fund manager.

In short, passive funds can be used as part of a well-balanced portfolio of assets as they offer a simple, diversified, and cost-efficient way to invest.

Myth vs. Reality: Debunking Common Beliefs
• Myth 1: Passive Funds Offer Guaranteed Returns
Passive funds do not offer guaranteed returns. All passive funds mirror the performance of the underlying index. When the value of the index falls, the NAV of the passive fund tracking it falls as well. Passive funds are also subject to market risk and are dependent on the performance of the market.

• Myth 2: They Don’t Need Any Monitoring
Passive funds need to be consistently monitored just like any other type of investment. Passive funds are not actively managed by a fund manager; however, investors still need to manage their own portfolio effectively.

If an investor believes that an index will continue to underperform or if a passive fund is not fitting well with an investor’s investment strategy, they may reduce their exposure to the passive fund. Similarly, an investor may increase their exposure in case of a favourable outlook.

• Myth 3: Passive Funds are Always Better than Active Funds
Both passive funds and active funds have their own place and are suitable in different situations. Investors may prefer to invest in both passive and active funds as part of a well-balanced portfolio. Both passive funds and active funds have their benefits and drawbacks. Investors should choose their exposure to both based on their personal investing strategy and goals.

• Myth 4: They Are Only for Beginners
Both beginners and sophisticated investors rely on passive investing strategies. Sophisticated investors may often leverage passive funds as a core part of their portfolio allocation. This is because passive investing can be a way for investors to diversify their portfolio while also being cost-effective.

• Myth 5: All Passive Funds Are the Same
Passive funds track the performance of the underlying index. There are many different indices in the market, each tracking a different set of securities. For example, there are indices which only track large-cap stocks, government bonds, or gold-related securities. Given the many different indices in the market, the performance of each type of passive fund may also be different and may be completely unrelated.

Making Informed Choices: Beyond the Myths
• Know Your Goals
It’s essential for every investor to know their investing and financial goals, along with their risk appetite. This awareness will help investors choose the right investments for their needs.

Investors may prefer to add passive funds to their overall investing strategy in case such funds fit their unique needs. For example, an investor who has a 100% equity portfolio may choose to invest in a gold-related passive fund in case they want to diversify from equities.

• Look Beyond Past Returns
The choice to invest in a fund does not depend only on past returns or potential returns. Investors can also consider other factors such as the expense ratio, tracking error, reputation of the fund house, and the role that a fund will play within the overall portfolio of the investor.

• Diversify
It’s not a choice between only investing in passive funds or not investing in passive funds at all. Passive funds can be a part of a well-rounded portfolio, which includes other types of investments as well. It’s advisable for investors to diversify their holdings so that they can avoid concentration risk.

Conclusion
Passive funds can be powerful tools if they are used properly within a sound investing strategy. They can also be a simple and effective way to participate in the market. It’s important to debunk passive fund myths and be aware of various products and their relative pros and cons in order to make the right investing decisions.

Disclaimer: This article 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 material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable.

While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). 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.

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