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Passive funds gaining popularity among investors
Published On , 5 Jun 2018 By ET Wealth
Passive investing, where the fund manager follows a pre-set benchmark index and replicates his portfolio exactly like the index and follows the benchmark as closely as possible, has been gaining popularity globally. Here, the investor eliminates the fund manager-related risks in the portfolio and carries only the market-related risks.
According to fund managers and mutual fund industry officials, every investor should have a part of his money invested in passive funds.
While selecting a passive fund, one of the factors that an investor should keep in mind is the nature of the index that the fund is benchmarked to. The index should be a stable one and also a well thought out one.
An investor should also look at the cost structure while selecting a passive fund. For example, there are two passive funds following the same benchmark, other factors remaining the same, then the fund with a lower expense ratio should be the preferred one.
To judge a better fund manager among those who manage passive funds, one should look at the tracking error: This is the deviation that a passive fund has from its benchmark. The smaller the tracking error, better the fund manager is.
THE ADVANTAGES OF PASSIVE INVESTING
Lower fund management cost which could be just about 25-30% of the cost paid in active fund management
With lower costs, extra money from the investor is invested in the market through the fund itself
Over several years this extra money compounds and grows to be a substantially large amount that is added to the corpus of the investor
There is nearly zero fund manager-related risk when one invests through passive funds
The investor takes only the market linked risks in his portfolio
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