Short Description: By purchasing and keeping long-term securities that replicate stock market indices, passive investing has evolved into a proven long-term low cost technique for accumulating wealth for retail investors. It saves time, effort and resources since you do not have to constantly rebalance your portfolio. You can enjoy the benefits of passive investing through investments in ETFs.
Introduction
Given the popularity of passive investment in several nations, particularly wealthy economies, India still has a long way to go in this area. With more and more retail investors turning to passive funds in recent years, their popularity is steadily increasing.
A long-term investment technique, passive investing comprises purchasing securities by following stock market indices. By holding the same securities and in the same proportion over the long term as the index, the goal is to replicate the index’s performance. Buy-and-hold strategies are the main focus of passive investing and trading to a minimum. As a result, passive investing has lower expenses because trading volume is smaller, and passive funds are transparent and straightforward to grasp, making them a good option for first-time investors.
A few years ago, when Indian investors were purchasing equity mutual funds, actively managed funds were assumed to be the best option without giving index funds a second thought. That was due to actively managed funds’ trailing returns across all equity categories showing that these funds were superior to their benchmarks.
However, given how poorly active funds have performed in recent years compared to their benchmarks, many Indian investors are now debating whether they should move from active to passive funds to save money. The worldwide trend toward passive funds and India’s expanding array of index products fuels this desire.
Like Western nations, India has seen an increase in passive investment strategy using exchange-traded funds (ETFs).
An ETF is a mutual fund listed on the stock exchange that may be traded in real-time like any other stock. Since ETFs are a sort of mutual fund, their portfolios consist of various securities that closely resemble the stocks that make up a market index.
As a result, you can invest in particular stocks that are a component of a market index without having to spend time and effort studying and choosing a small number of stocks. Due to their low expense ratio, ETFs are more affordable than other categories of mutual funds and stock investing.
Benefits Of Investing In ETFs For Achieving Passive Investing Goals
Due to increasing levels of knowledge, acceptance of digital technologies, and product improvement over time, investors are beginning to grasp the potential of ETFs. ETFs, combine the flexibility of stock trading with the diversification and affordable prices of mutual funds.
ETFs offer exposure to various stocks for a small fraction of the cost of direct investment and have multiple benefits above it, which has drawn favour from newer investors.
Aside from the standard index and ETFs, theme-based ETFs supporting ideas and trends anticipated to last for the next few years have also acquired popularity. Investors are moving away from buying individual story stocks and thematic ETFs to diversify their holdings.
Advantages of ETFs
- ETFs are a lifesaver if you want to invest in stocks but lack the time or research resources to select the best equities for your portfolio. ETFs make it far easier for you to invest in the stock market than buying individual stocks without sacrificing liquidity. When opposed to investing directly in stocks, they provide more diversification at a lesser cost.
- ETFs are accessible in the bond market, giving you the same access to the debt asset class as a mutual debt fund. Depending on your investment objectives, you can efficiently invest in various corporate bonds or stocks and trade them exactly like stocks or bonds.
- Investors gain from liquidity because ETFs and index funds have no lock-in period and are open-ended funds. As a result, they can withdraw investments as needed.
- As these funds follow a specific index, active fund management and the selection of stocks do not require a group of research experts. Every day, ETFs are actively traded on stock exchanges, similar to intraday trading, which gives investors flexibility and simplicity when choosing their investments. The cost of investment is also low.
- If you wish to invest in the stock market but know nothing about investing, ETFs and index funds may be an excellent option. For portfolio diversification, they are favoured by seasoned investors. By mandating that fund managers mirror the index composition, passive investing eliminates human discretion and bias in investment decision-making.
Takeaway
The passive wave is one of the many changes the mutual fund business is seeing, causing investors to rethink their mutual fund investments. The passive fund phenomena will undoubtedly have something for everyone as more and more fund companies lead the wave by providing cutting-edge programs that follow numerous indices and sectors. Check out Alphaniti’s ETF Corner to invest in ETF baskets.
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