Passive investment best source of passive income

“The best way to own common stocks is through an index fund.” -Warren Buffet

    Over the decade, the Indian market positively skewed towards the actively managed fund.

 Such diversion to actively managed funds is logical owing to higher returns in long term than passive funds. 

 The Indian financial market offers a range of investment products from debt and equity classes.

 Calibrated and finely tune products play an indispensable role in not only assets allocation but propose diversification and protection against downside risk.

            Wealth creation is a long term process that needs discipline, commitment, and goal-based approach.

 One such long investment strategy that is gaining momentum of late is passively managed funds.

 In developed countries like the USA, UK, etc. passive funds are more popular due to efficient market, low information asymmetry, and difficult to beat benchmark indices.

Warren Buffett is a great advocator of passive investment strategy. According to him, it gives higher returns than active investment strategies, which involve heavy expenses.

 John Bogle, the founder of the Vanguard Group, created the first index fund that mirrored the S&P 500 in 1976 to gauge market performance by tracking this index fund.

“Buy and Hold strategy” is ultimate motto passive investing. Key peculiarities of passive investment are low costs and low risk, tax-efficient, diversified holdings.

The word passive investments itself enumerate the less intervention, laissez-faire and non-active involvement of investors. The main categories under passive investment are Index fund and Exchange traded fund (ETF).

·         Index mutual fund: This fund is tracking the underlying index like NIFTY, SENSEX, etc. and returns are a replica of that index.

      These are passively managed funds invests in the same stock and the same proportion of NIFTY, SENSEX. It does not require demat account. The investor gets the units based on NAV of the particular funds.

·         Exchange traded fund (ETF): ETFs resemblance to index fund but the only difference is that the ETF is listed on a stock exchange such NSE and BSE and directly bought and sold on the stock exchange requires demat account.

     Buy or sell an ETF leads to transfer of ownership and not to shift in the AUM of the ETF.

Conclusion: In developed countries like the USA, UK, etc. passive funds are more popular due to efficient market, low information asymmetry, and difficult to beat benchmark indices while developing markets such as India are less efficient and always have scope to beat benchmark indices return.

Besides lower returns, passive investment still holds lots of ground for investment. The Indian financial market has made tremendous progress in the past few years. Digitalization,

 fast-speed network providers, and penetration of discounted broker’s services have formalized the investment platform under a single-window system. Investors must consider the passive investment strategy as a viable option for long-term wealth creation and portfolio diversification.

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