Passive investing is believed to be a boon for retail investors. Instead of investing in a multitude of securities and having to track them on a regular basis, investors can opt for index mutual funds and throw their worries out of the window.
Undoubtedly, there are a number of advantages of investing in index funds, one of the most salient ones is that these funds spare the investors from the need to track their portfolio on a regular basis.
There are 186 index mutual funds with net assets under management (AUM) amounting to ₹1.79 lakh crore as on July 31, 2023.
A year ago (i.e., in July last year), there were only 95 index schemes with net AUMs of ₹94,589 crore, reflecting a growth of 96 percent in the number of schemes, and of 89 percent in the amount of assets.
|Time||No of index funds||Net AUMs (Rs)|
|July 2022||95||94,589 crore|
|July 2023||186||1.79 lakh crore|
Passive schemes have gained a vast popularity among small investors primarily because of dismal returns posted by active mutual funds in the recent past.
Most active mutual funds usually fail to beat the benchmark index in the long run. Over the past three-year period, a vast majority of large cap active schemes (more than 96.7 percent) underperformed the benchmark index, whereas 87.5% of large-cap schemes underperformed over a one-year period, shows the S&P Indices Versus Active Funds (SPIVA) Scorecard. There are a number of other advantages. These include the following:
No need to track the markets: Once investors invest in passive funds, they don’t need to keep track of markets on a real time basis.
The portfolio grows slowly and gradually over a period of time.
Beneficial for long term investors: Since market indices demonstrate volatility during the year, it is seen that the indices rise in the long run. So, an investment made in passive funds tends to grow in the long run.
So, it is advisable to opt for passive funds for long-term investors. Historical data shows that the market indices fell for only 9 years out of a total of 32 years in the past. This is regardless of the deep drawdowns during these years.
Safer than active funds: When compared with active funds, passive funds are safer and are likely to grow in the long run unlike active funds. In the past five years, 93.8 percent of large cap active funds underperformed the index, shows the SPIVA scorecard.
To sum up, investing in an index mutual fund is considered advisable for retail investors who are always recommended to buy right and sit tight in order to meet long term financial goals.