Passive Mutual Funds

November 15, 2023

Passive Mutual Funds

Passive Mutual Funds are designed to replicate the performance of a market index, such as the NSE Nifty 50 or the S&P BSE Sensex. The fund invests in the same number and proportion of stocks as the index it tracks. This eliminates the need for active management, reducing the expense ratio and making it a cost-effective investment option.


What Is Passive Mutual Fund?

Passive mutual funds are investment instruments that seek to mimic the performance of a particular market index, such as the Nifty or the SENSEX. While they are managed by fund managers, the manager’s role is not to actively pick and choose individual investments but rather to ensure the fund’s portfolio mirrors the index it tracks. They are generally less expensive and are considered a long-term investment option.

Passive Fund Example

Let’s consider the “XYZ Nifty Index Fund,” which aims to replicate the NSE Nifty 50 index. For example, if the Nifty 50 index has a 40% weightage in Information Technology (IT) stocks, the XYZ Nifty Index Fund will allocate 40% of its total portfolio to IT stocks. This ensures that the fund’s performance closely aligns with the index’s. 

The fund manager’s primary role here is not to actively trade or pick stocks but to ensure the asset allocation is as similar to the Nifty 50 index as possible. Over the years, the XYZ Nifty Index Fund has demonstrated a strong track record of closely matching the index’s performance, with only a minimal tracking error. 

This makes it an attractive option for investors looking for market-matching returns without the higher fees associated with active management.

Types of Passive Funds?

There are four types of passive funds, which are as follows:

  1. Index Funds 
  2. Exchange Traded Funds (ETFs)
  3. Fund of Funds (FoF)
  4. Smart Beta Funds / ETFs
  1. Index Funds: Index funds are designed to mimic the performance of a specific stock market index, such as the S&P 500 or NSE Nifty 50. The fund manager’s role is to ensure that the portfolio’s asset allocation closely mirrors the index it tracks. This allows investors to gain broad market exposure without buying individual stocks.
  1. Exchange-Traded Funds (ETFs): ETFs try to reflect the performance of an index, just like index funds do. However, the key difference lies in their trading mechanism. ETFs are traded on stock exchanges just like individual stocks, offering investors the flexibility to buy and sell units throughout the trading day at market prices.
  1. Fund of Funds (FoF): Fund of Funds are passive funds that invest in other mutual funds, often a mix of index funds and ETFs. The primary objective is to offer diversified exposure across asset classes or sectors through a single investment vehicle. While the underlying funds may be passive, the FoF manager may actively manage the allocation among those funds.
  1. Smart Beta Funds: These funds combine passive and active investment strategies. Smart Beta Funds aim to maximize returns by selecting securities based on specific factors such as volatility, value, growth, and momentum, unlike traditional ETFs, whose sole purpose is to replicate an index. This permits a more nuanced investment strategy, with the potential for higher returns or lower risk compared to traditional index-tracking funds.

How To Invest In Passive Mutual Funds?

Investing in Passive Mutual Funds is not just about picking the right fund; it’s also about choosing the right platform to make your investment. The first step is to align your investment choices with your long-term financial goals and your risk tolerance. Once you’ve established your investment objectives, you can proceed with the following steps to make your investment:

  1. Choose an Investment Platform: The first crucial step in your investment journey is selecting the right platform. Alice Blue is a notable option that offers a seamless user experience, low fees, and a wide range of investment choices. The platform you choose will serve as your gateway to various funds, so make sure it aligns with your investment goals and preferences.
  1. Choose a Fund: Once you’ve settled on an investment platform, the next step is to pick a fund that aligns with your financial objectives. Look for funds with a consistent performance history and the type of market exposure you desire, whether that’s a specific sector or a broad market index.
  1. Invest: After choosing a fund, the investment process is usually straightforward. If you’re using Alice Blue, for instance, you’ll find the process to be user-friendly, often requiring just a few clicks to complete your investment.
  1. Monitor: The final step is to keep an eye on your investment. While passive funds generally require less daily oversight, monitoring its performance will help you understand market trends and make future investment decisions more effectively.

Active Vs Passive Mutual Funds

The primary difference between active and passive mutual funds is that active funds employ fund managers who actively choose stocks and bonds to outperform the market. Passive funds, on the other hand, seek to replicate the performance of a particular index and typically have lower fees.

ParameterActive FundsPassive Funds
Management StyleActively managed by a team of experts aiming to outperform the market.Passively managed, aiming to replicate the performance of an index.
FeesGenerally higher due to active management and research.Lower due to passive management.
RiskCan be higher due to active trading.Generally lower and mirrors the risk of the underlying index.
FlexibilityFund managers have the flexibility to switch investments.Investments are fixed based on the index being tracked.
PerformanceAims for higher returns but comes with higher risk.Aims to match the index performance, generally less risky.

Best Passive Mutual Funds

SL NO.Passive Mutual Funds1-Year Return (%)
1Nippon India Nifty SmallCap 250 Index Fund Direct-Growth31.33
2DSP Nifty 50 Equal Weight Index Fund Direct-Growth18.14
3Franklin India NSE Nifty 50 Index Direct-Growth14.10
4Nippon India Index Fund S&P BSE Sensex Plan Direct-Growth14.67
5Bandhan Nifty 50 Index Fund Direct Plan 14.37

Note: If you’re new to the investing world, it’s always beneficial to consult a financial advisor. They can provide personalized advice tailored to your financial situation and help you navigate the complexities of investing.

Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.

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Passive Mutual Funds – Quick Summary

  • Passive Mutual Funds aim to replicate the performance of a specific market index and are generally less expensive than active funds. They are considered suitable for long-term investment.
  • There are four main types of passive funds: Index Funds, Exchange-Traded Funds (ETFs), Fund of Funds (FoF), and Smart Beta Funds. Each offers a unique approach to passive investing.
  • Investing in Passive Mutual Funds involves several steps, including choosing an investment platform like Alice Blue, selecting a fund that aligns with your goals, making the investment, and monitoring its performance.
  • The key difference between active and passive funds is the management style. Active funds aim to outperform the market, while passive funds aim to replicate a specific index. Passive funds generally have lower fees and risks.
  • Some of the best-performing passive mutual funds include Nippon India Nifty SmallCap 250 Index Fund and DSP Nifty 50 Equal Weight Index Fund, among others. These funds have shown promising returns over the past year.
  • Invest in best passive funds at no cost with Alice Blue. With their refer and earn program – you will get ₹ 500 for every referral and 20% of brokerage your friend pays for a lifetime – one of the highest in the industry.

Passive Mutual Funds – FAQs  

What is passive mutual funds?

Passive mutual funds are investment options that aim to mirror the performance of a specific market index. They are managed to keep the portfolio as close to the index as possible rather than trying to outperform it.

Which is better active or passive mutual funds?

The choice between active and passive mutual funds depends on your investment goals, risk tolerance, and preference for management style. Active funds aim for higher returns but come with higher fees and risks. Passive funds are generally less risky and have lower fees but aim to match the market, not beat it.

How do you identify passive mutual funds?

Passive mutual funds are distinguished by their investment objective, which is to replicate the performance of a particular index. They also have lower expense ratios compared to active funds. Always check the fund’s prospectus or website for this information.

Are passive funds less risky?

Passive funds generally carry less risk as they aim to replicate the performance of an index. However, they are still subject to market risks and will decline in value if the index they track declines.

Should I invest in passive funds?

Investing in passive funds can be a good option if you’re looking for lower fees and a long-term investment strategy that doesn’t require frequent monitoring. They are also suitable for diversifying your portfolio.

Which are the best passive mutual funds in India?

Based on recent performance, some of the top passive mutual funds in India are:

  • Nippon India Nifty SmallCap 250 Index Fund Direct-Growth
  • DSP Nifty 50 Equal Weight Index Fund Direct-Growth
  • Franklin India NSE Nifty 50 Index Direct-Growth

To gain a better understanding of the topic and access more information, explore the articles below that cover mutual funds, stock market insights, trading strategies, and organizational perspectives.

Structure Of Mutual Funds
Mutual Funds vs Hedge Funds
What is Multi Cap Fund
Types of Mutual Funds
Difference between Fundamental Analysis and Technical Analysis
EV Stocks in India
After Market Order
What is Intraday Trading
How to Become a Stock Broker?
MCX Meaning

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