Five Myths About Passive Mutual Funds Schemes Busted

 All of us save some part of our earnings and invest to achieve our time-bound financial goals. So, where do you invest your surplus? Broadly speaking, it depends upon your risk profile, investment objective, investment time horizon, personal aspects, and macroeconomic factors. There are various asset classes to invest in. Exposure to suitable asset classes can be taken through various investment vehicles. Mutual Fund is a very common vehicle among others. Within Mutual Funds, passive Mutual Funds are gaining popularity in India. As practicing Certified Financial Planners in Kolkata, we are observing that many have various myths about passive Mutual Funds schemes in India. This article is intended to bust 5 myths about passive investing.

Before discussing the myths, let’s understand the basics of passive Mutual Funds schemes.

You must have heard, “Today market has gone up.” What does this mean? The market here refers to the stock market. Stock market movements are indicated via a stock market index viz. Sensex, Nifty 50, etc. So, when the Sensex and/or Nifty 50 go up, you get to hear that the market has gone up. The ups and downs in Sensex indicate the performance of 30 stocks in the portfolio. Again, the ups and downs in Nifty 50 indicate the performance of 50 stocks in the portfolio.

A passive Mutual Fund scheme is a portfolio of stocks or bonds aimed to mimic the composition and performance of a financial market index.

XYZ Index Fund-Sensex Plan mimics the composition and performance of the Sensex index.

ABC Index Fund-Nifty 50 Plan mimics the composition and performance of the Nifty 50 index.

Please note that apart from Index Fund-Sensex Plan or Index Fund-Nifty 50 Plan, there are many other Index Funds.

To develop financial awareness, let’s figure out the myths.

Passive Funds Offer No Opportunities for Outperformance:

Myth: Some investors believe that passive funds simply aim to match the performance of an index, and, therefore, they can never outperform the market.

Reality: While passive funds aim to replicate an index's returns, they can often outperform actively managed funds with higher fees over the long term, especially in markets where active managers struggle to consistently beat the index.

Passive Funds Lack Diversification:

Myth: There's a misconception that passive funds are not as diversified as actively managed funds.

Reality: Most passive funds are designed to provide broad market exposure and diversification. For example, a total stock market index fund would include a wide range of stocks, offering diversification across different sectors and industries.

Passive Funds Are Only for Novice Investors:

Myth: Some people believe that passive funds are best suited for beginners who lack the knowledge or time to manage their investments.

Reality: Passive funds are suitable for investors at all levels of experience. They are especially favored by savvy investors who appreciate low costs and simplicity in their portfolios.

Passive Funds Are Only for Bull Markets:

Myth: It's a common misconception that passive funds can only perform well in a bull market.

Reality: Passive funds can be a sound choice in any market environment. They don't rely on an active manager's ability to make market-timing decisions, and they often perform well during bear markets due to their lower fees.

All Passive Funds Are Identical:

Myth: Many people assume that all passive funds tracking the same index are identical in terms of performance and fees.

Reality: Even passive funds tracking the same index can have differences in expense ratios, tracking errors, and dividend reinvestment policies. Investors should carefully compare the details of different funds before making a selection.

In summary, passive mutual funds are a valuable and flexible investment option for a wide range of investors. They can offer cost-effective, diversified exposure to the markets while dispelling many of the myths surrounding their performance, diversity, and suitability for different market conditions and investor profiles.

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