Fewpal
0 votes
29 views
in Skill Tips by (25 points)

Please log in or register to answer this question.

1 Answer

0 votes
by (51.4k points)

Passive investing is an investment strategy to maximize returns by minimizing buying and selling. Index investing in one common passive investing strategy whereby investors purchase a representative benchmark, such as the S&P 500 index, and hold it over a long time horizon.

As the name suggests, passive investing is all about tying down to your portfolio to an index or an ETF. There are four ways of creating a passive investment strategy in the Indian context.. 

You can have a passive approach even in direct equities. An equity investor can create a passive strategy by buying up all the index stocks in the same proportion as the index. By doing that, your portfolio performance will approximately reflect the performance of the index (Nifty or Sensex) over a longer period of time. The real challenge is something different. For an individual that can be quite complicated as he will have to track index changes, weightage changes, corporate actions etc. 

A simpler way to replicate the above will be to directly buy an index fund, which is offered by many mutual funds in India. An index fund buys up the entire index stocks in the same proportion as the index. The fund manager manages the tracking error and ensures that the fund performance is as closely aligned to the index as possible. Index funds can be bought from the mutual fund houses, from distributors or even online. The big advantage of index funds is that costs are very low compared to active funds. 

ETFs are a slight variation of the index fund. Like an index fund, the ETF also creates a portfolio of index stocks in the same proportion. The only difference is that the ETF is listed on a stock exchange and can be bought and sold on any recognized stock exchange. When you buy or sell an ETF, it only leads to transfer of ownership and not to shift in the AUM of the ETF. Additionally, ETFs are also available on other benchmarks like ETFs on gold, ETFs on silver, ETFs on equity indices, ETFs on debt market indices etc. ETF units can be bought and sold through your existing equity trading account and can be held in your regular demat account. 

There is a slight variation of passive investing which entails buying and holding a portfolio of dividend yield stocks. Dividends are tax-free in the hands of the investor up to a limit of Rs.1 million per year. Thus a stock that offers a dividend yield of 6 % will actually be paying an effective tax- adjusted return of {6 %/(1-0.3)} = 8.57 %. Most high dividend yield stocks are saturated stocks and hence the volatility risk is quite low in such stocks.

The moral of the story is that there is a lot of wisdom that investors are beginning to see in passive investments like ETFs and index funds. They give you lower costs and also mirror macro market returns. The choice is yours; how you want to create a passive portfolio.

Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. Students (upto class 10+2) preparing for All Government Exams, CBSE Board Exam, ICSE Board Exam, State Board Exam, JEE (Mains+Advance) and NEET can ask questions from any subject and get quick answers by subject teachers/ experts/mentors/students.

Categories

...