PASSIVE INVESTING

Passive investing refers to a strategy being adopted by investors to optimise their returns and profits by avoiding frequent churning of portfolio by trading securities but rather buying and holding a wide base of stocks for a longer horizon. 

In these times, where active managers try to beat the stock market by trading securities by undertaking all sorts of research and analysis, passive investing believes in purchasing and holding a wide based portfolio which is usually an index fund. 

Inactive investing, the cost tends to be higher because of researching about securities and hence the returns are expected to go even higher by the investors. 

TYPES OF PASSIVE INVESTMENT STRATEGIES 

Given below are the types of passive investment strategies that can be adopted by the common investors:

1. ETFs:

These are very identical to index funds and follow the route of passive investing, the only difference being that the ETF is listed on a stock market and can be traded by investors which will only lead to a transfer in ownership 

2. Direct equity:

An investor can adopt a passive investment strategy by buying the shares in the index to the same ratio and proportion of the index, such as Sensex. Hence the returns of the investor would mirror the returns of the index of the economy. The hurdle for the investors in this case will be to frequently track the index and make the necessary changes in the portfolio. 

3. Purchase of Index Funds:

An investor can choose to simply buy an index fund that goes on to merely holding securities in replication to the index of the country. The fund managers of the index funds would make all efforts to ensure that the tracking error is low and the performance will be very closely aligned with that of the index which is being tracked. 

WORKING OF PASSIVE INVESTING 

Passive investing adopts the style of buy and hold philosophy. It tends to avoid the frequent trade of securities thereby reducing the high costs. It is a simple and easy investment strategy which aims to diversify investment holdings in many securities rather than holding single bonds or stocks. 

The prime aim is not to beat the market but rather the portfolio should track and provide returns equal to that of the prominent stock exchanges of the country, and this is usually implemented by investing in low cost and widely diversified index funds. 

MERITS OF PASSIVE INVESTING

1. Diversification:

Rather than having to hold single shares and stocks, index investing strongly believes in having to diversify among various stocks that track the stock index of the country and thereby promote diversification and reduce concentration. 

2. Reduction in costs:

When compared to active investing, here the expenses are significantly reduced owing to reduced research as there is no frequent trade of shares. 

3. Reduced taxes:

By having to limit the constant trade of shares, passive investing also tends to greatly reduce various taxes related to investments. 

4. Simplicity:

These types of investing tend to be famous among the masses owing to the ease and simplicity involved in adopting this. We have to merely hold a wide based ETF or index fund or simply invest in shares that replicate and track the index and that’s all. 

DOWNSIDES OF PASSIVE INVESTING 

This phenomenon does not go on to beat the market rather it offers returns in line with that of the market. There are times when an actively managed fund goes on to deliver awesome returns beating the market to a great extent. 

Passive investing often tends to miss out on such occasions and will be limited to a smaller return in line with the index funds. However, such cases are very rare and the actively managed funds may also go down with heavy loss and negative returns if the markets were to correct, whereas the index funds would not be widely impacted to such an extent. 

THE CRUX 

Passive investing, owing to its simplicity of having to buy and hold a broad based index of securities ten to gain popularity among the masses. They are simple and easy to follow. They only miss out on the rare superior returns that active funds tend to generate. 

However, they make for an excellent investment portfolio to own being to the fact it does go on to replicate and produce returns similar to the index that is often considered the barometer for the economy.