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Passive investing is gaining popularity in India. Around 50 passive schemes garnered around Rs 1,50,000 crore AUM in 2021. Passive funds have made their mark in the current year as well are managing to attract big inflows. A fund on the market generating so much chatter- sounds interesting, doesn’t it? But what’s the buzz all about?

What are Passive Mutual Funds?

To understand Passive Investment, one must keep in mind the phrase, “Slow and steady wins the race.”

Passive investing is a long-term strategy for building wealth by buying securities that mirror stock market indexes, then hold them long term.

Under this strategy, an investor’s aim is to match the market, not beat it. Just like fine wine, one must hold stocks and let them age over time to generate substantial returns.

To help our viewers understand passive investing funds better, we were joined by Niranjan Awasthi, Head of the Product Marketing & Digital Business, Edelweiss AMC.

He said that Passive Funds track a market index or a specific segment and not a particular stock. The risk involved in investing is lowered when it comes to this asset as it does not require a fund manager to operate it, hence the element of human bias is eliminated. These funds include securities like Exchange Traded Funds (ETFs), Index Funds, Gold ETFs and Fund of Funds.

AUM Growth In India:

Passive Fund AUMs have skyrocketed over the last few years, especially post 2020. In the last six months, AUMs have recorded a growth of 22%, as compared to its equity and debt counterparts, that have registered a growth of 6 and 12% respectively.

At the end of July 2022, Passive Fund AUMs stood at Rs 5.71 lakh crore.

What has aided this growth?

Passive Funds have received a lot of aid from SEBI in the forms of new norms. The minimum subscription for NFOs (New Fund Offers) has been reduced, SEBI has stipulated the maximum range of tracking errors that the funds can make, and SEBI has permitted re-balancing in passive funds.

Passive Funds: The Good, The Bad and The Ugly:

Like any other investment avenue, passive funds too have their plusses and minuses. The positives include reduced risk, flexibility, tax efficiency and simplicity. On the other hand, the negatives are that even though these funds are on the lower end of the risk spectrum, they are still subject to market risks and market movements. They can also be a little limited at times in terms of the returns or options they provide to an investor.

Investing in a Passive Fund- What Must You Do?

Before investing in a passive mutual fund, it is important to identify your financial goals. If your goal is retirement planning or you are saving up for an event that is likely to occur 15-20 years from now, then passive funds are a good idea for you. But if your needs are sprouting in the short term, then probably you should reconsider passive funds. Determine your risk appetite, since this fund is a low-risk investor friendly fund. Chart out an asset allocation plan and distribute your savings into varied investments.

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