Every individual strives to become financially self-reliant, as it is crucial for their self-growth and long-term security. It also grants them the freedom to pursue long-term goals without any financial limitations. Moreover, it empowers them to tackle any unprecedented crisis, such as job loss or health emergencies, without external financial aid.
To achieve this financial steadiness, passive investment is one of the key strategies. It allows investors to create a portfolio that imitates an underlying equity index or commodities and holds them for the long term.
Thus, it maximises their wealth as well as shields them from short-term market fluctuations. Moreover, it is an ideal investment strategy for those who lack the expertise and time to decode the market trends and invest their money accordingly. Thus, passive investments automate investors’ investments while also ensuring their long-term financial independence.
Leverages the benefits of the growing economy
Passive investments entail investing money in securities over a long time. It is crucial to note that as the economy expands, the value of investments also appreciates over time. In other words, passive investments are likely to reap optimal returns in the growing economy of India in the long term. Thus, passive investment allows investors to take advantage of the compounding effect and avoid short-term market volatility.
Diversification
Passive funds such as index funds and ETFs imitate the performance of broad-based indices instead of outperforming them. This allows investors to invest in a basket of well-diversified stocks which offer two-fold benefits. Firstly, it brings stability and mitigates risk as the dependence on returns from a single stock gets reduced. Secondly, it ensures maximum returns in the long term. Thus, maintaining an optimal risk-return tradeoff.
Lower management and transaction cost
In contrast to active investments, passive investments involve lesser transactional expenses such as tax on capital gains and brokerage commission. This is because these investments don't require investors to frequently trade their holdings in the market. Also, investors don’t have to spend their money, time and effort on doing extensive research and analysis to understand market dynamics. Thus, it also reduces managerial costs alongside saving time and effort.
Moreover, there are multiple passive funds available such as Index Funds, ETFs, Robo Advisors, Direct Equity and Mutual Funds. However, it is always advised to investors that while choosing an ideal one they must make sure that it aligns with their income, risk tolerance and long-term goals.
In a nutshell, passive investment provides individuals with a financial cushion in times of emergencies along with a sense of long-term financial independence. However, these investments are well-suited for those investors who have long-term financial goals such as paying off long-term debt or buying a house or a car but have a low-risk appetite.
Palka Arora Chopra, Director, Master Capital Services Limited
