Passive investing comes with a goal to build wealth gradually over the years. In cases of passive investment, regular trading, buying and selling, are limited. However, the return is maximized through medium and long-term investment. The ‘buy and hold’ strategy is applicable in this form of investment, and it has been noticed that wealth formation is better compared to active investing, in the long run. With this form of investing, the charges are minimum, as well as the risk.
Various Strategies of Passive Investment in Stock Market
The best example of passive investment is investing in an index fund. In case of an index fund, you invest a good amount of money to a fund that mimic the growth of the index that it is part of. There is no active manager to tackle the growth regularly. However, they weight the funds, once in a while, and make sure it follows the growth trend. There are several strategies of investing in a passive form of fund.
- The simplest form of passive investment is to buy an index fund, just like a mutual fund. The fund manager will take care of the investment and purchase securities to make sure it mimics the market growth. This can be purchased from many mutual fund houses. The manager will be investing on your behalf and will remove any tracking error.
- Another option is to buy all stocks present in the particular index in same proportion. So, the overall rise and fall of the market will be reflected through the fund. You will have to buy them together and sell them together as well. However, this introduces several challenges including change in weightage, tracking the index, and checking corporate actions.
- You can also purchase an exchange trade fund or ETF where a portfolio is created out of the index stocks. Apart from EFT of shares, you can also purchase EFT of gold, silver and equity indices. EFT fund is listed under popular exchanges, and in this passive investment, there is an ownership transfer. The AUM, (Asset Under Management), remains the same.
- Instead of putting all money in one go, the passive investment can be carried out over a span of time. You can deposit a certain amount at regular interval of time while waiting for a long-term result.
Passive investment witnesses a new chapter in 2020. India’s passive investment as of the first quarter of 2020 is $24 billion with 86 passive products. Just five years ago the numbers were $2 billion and 57 passive products. Below you can see in the chart, the passive investment AUM has grown considerably since 2009, and with the 2020 date being added to that, the growth has been implacable.
Passive investment, in many ways is the most important form of investment where you don’t need to have much knowledge of the market. The investor pays a minimum charge for managing the portfolio and this is much lower than mutual funds. It is majorly a long-term investment for future return.