Passive funds are ideal for investors who are looking for a cost-effective way to invest in mutual fund schemes. For those who are not aware, Mutual Funds can be broadly classified as actively managed and passively managed schemes. Most people are aware of active funds and the way they work. Active funds have dedicated portfolio managers who actively make investment decisions and decide which stocks to consider to build a rewarding portfolio. But in the case of passive funds, they are constantly tracking the market index and try to generate uniform returns while keeping the tracking errors to a minimum. While active funds seek to consistently outperform their underlying benchmark and generate higher returns, index funds are designed to generate returns similar to the index they are tracking.

Index funds are passive mutual funds that invest the majority of their investible corpus in underlying securities that incorporate the benchmark in the same proportion without changing the portfolio composition. The performance of an index fund depends entirely on how the underlying securities included in the benchmark perform in changing market cycles.

Index fund managers ensure that the portfolio composition of the fund remains similar to that of the index. If the stocks in the index are changing, the fund manager makes sure that these changes are also made in the index fund portfolio to reduce tracking error.

One
index fund Can track any popular index like Nifty 50, Sensex 30, etc. Since they follow a passive investment style, index funds are known to have relatively low expense ratios. This is what makes index funds a cost-effective investment option. Investors can either invest in index funds in a lump sum or they can also opt for a systematic investment plan. Unlike other passive funds like ETFs which require a demat account to invest in, one does not require a demat account to invest in index funds. Investors can use their regular mutual fund account to invest in index mutual funds. Those who opt for the SIP route do not have to worry about the ups and downs of the market as they invest small amounts periodically in market cycles.


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