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Passive investing: A slow & steady long-term race
Published On , 21 Feb 2018 By TOI
Lately the world seems to be taking increasing interest in passive investing, a style of investment which primarily mandates that once an investor buys a stock, he/she should hold it for a long period of time and over time the market will reward him/her with superior returns. At the core of this investment strategy is the fact that this is a low cost strategy, and the savings from the low cost to investors over the long run add up to the returns. The second trait that goes in favour of passive investing is that since buying and selling is limited to a minimum, that also leads to substantial Tax Savings for investors, which again add up to the returns over the long run.
Passive investing is not about quick returns by investing in one or two sure shoot winners that give multiple returns over a short period of time. Neither is it about trying to time the market right. Rather it’s a slow-and-steady race to create wealth over the long run.
Passive investment took off well from the 1970s after index funds were introduced in the market. And it went into an overdrive after exchange traded funds were introduced in the 1990s. While index funds are mutual funds that track a particular index, which could be of a particular sector or a well-diversified one, ETFs are also funds but these could be traded in the market on a real time basis. ETFs give investors the option to trade in its underlying index on a real time basis but at a low cost.
According to market experts, it’s better for the first time investors to invest through the index fund route while those investors who want to buy and sell an index on a real time basis, may consider ETFs over index funds.
One of the biggest advantages of passive investing is that this style of investing eliminates the fund manager risk, industry players said. This is because passive fund management requires almost zero discretionary power of the fund manager in selecting the index or the sector on which an ETF or an index fund is based. In comparison, in active fund management the fund manager is required to select the stocks that he/she will have in his portfolio. So while an actively managed fund carries both the market risk and the fund manager risk, a passive fund carries only the market risk and no fund manager risk.TFs over index funds.
Billionaire investor Warren Buffett is one of the most vocal supporters of passive investing. Although Buffett himself is not a passive investor but his style of investing is that of buying and holding stocks of companies which he thinks can give superior returns over the long term.
Another leading supporter of passive investing is John Bogle, the founders of Vanguard Group, one of the most respected fund management houses in the world that invests through this investing style.
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