Passive Investing and How It Works?

What is Passive Investing?  

Think of passive investing like setting your phone alarm once and letting it ring every morning; you don’t need to reset it every day. Similarly, in passive investing, your money is invested in a way that follows the equity market automatically.

There’s no trying to “beat” the market. You just sit back and let your investment grow slowly and steadily over time.

In simple terms, passive investing means putting your money in a fund that mimics a benchmark index, like the Nifty 50 or Sensex one of the simplest ways to invest money online and let it grow with the market.

What are Passive Funds?  

Passive Funds are investments that aim to mimic the performance of a specific index, like the Nifty 50 or the Sensex. They do this by holding the same securities as the index, in similar proportions, so that their returns closely match those of the index.

What are the Pros of Passive Funds?

• Less Time, Less Stress: You don’t need to track the stock market daily or read complicated finance news. Passive funds follow the market automatically, so you can do passive investing and focus on your life goals, whether that’s kids, career, or self-care.
• Cost-Effective: Because these funds are not actively managed by experts, they charge very low fees. This means more of your money stays invested and grows over time.
• Smart Diversification: Instead of putting all your money into one stock, passive funds spread your money across top companies. This helps reduce risk; if one company underperforms, others can balance it out.

What are the Cons of Passive Funds?

• No “Extra” Returns: Passive funds only aim to match the market’s performance. They don’t try to beat it. So, if you’re looking for higher-than-average returns, passive funds might feel limiting.  
• Limited Flexibility: Since these funds follow an index, they can’t make changes even if some companies in the index are underperforming. The fund has to stick to the index, no matter what.  

What are the types of passive funds?

1. Index Fund: 

Index Funds are a type of mutual fund, but they replicate a specific index. This means that they tend to invest in the same securities as the underlying index and try to mimic the performance of the index as well. 

What are the pros of Index funds?

• Convenient – No Demat account needed to invest.
• SIP-Friendly – You can start with small monthly investments.
• No Trading Costs – Not traded on the stock exchange, so no extra charges.

What are the cons of Index Funds?

• Can’t generate alpha as it mimics the index returns.
• Limited Flexibility – Cannot adjust holdings based on market changes.

2. Exchange Traded Funds (ETF)

An ETF is a type of investment that tracks a particular market index. It tries to replicate the performance of the index as much as possible. They are traded on the stock exchange and can be bought or sold at market prices.

What are the pros of ETFs?

• Diversified – Gives exposure to a wide range of stocks or assets.
• Low Cost – Lower fees as they require minimal management.
• Liquid – Can be bought or sold anytime during market hours.

What are the cons of ETFs?

• Demat Required – You need a Demat account to invest, which can be a barrier for some.
• No SIP Option – You can’t set up monthly SIPs like you can with Index Funds.
• Brokerage Charges – Buying and selling ETFs may involve trading fees or brokerage costs.

ETF vs. Index Funds:

PARAMETERS	ETFs	INDEX FUNDS
Structure	Exchange Traded Funds	Mutual Funds
Management	They can be traded on the stock exchange at the will of the investor.	They are managed by fund managers.
Price	Its price fluctuates as per demand and supply.	It has a Net Asset Value (NAV) that is updated at the end of the day.
Demat A/C	Requires a Demat account	Doesn’t require a Demat account
Investment Method	SIP Investment is not available	Investment can be done through SIP or lump sum
Cost	Lower expense ratio than Index funds but may involve trading charges	Higher expense ratio than Index ETFs

In conclusion, passive index fund investing & passive ETF investing attempt to mimic market indexes and replicate their performance. However, since they mimic the markets, they don’t generate an alpha (excess return over the return generated by the benchmark index) for the investors. To generate an alpha, women can explore investing in actively managed mutual fund portfolios.  

To invest in actively managed Mutual Fund portfolios, check out Lxme’s goal and time-based portfolios and start investing today! These portfolios are well-researched and are curated by experts—perfect for those who want to learn investment while growing their money. Begin your journey with just Rs. 100!

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Further read:

• Why Gold Investing is a Smart Choice for Long-Term Wealth
• Celebrating Women in Investing: Top 5 Inspiring Women Investors in India
• Importance of Investing In Passive Income Sources