What are the different types of passive investment strategies that can be deployed in the markets? Also, when does passive investing make more sense?
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Passive investing broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market.
There are four different types of passive strategies prevailing in the market, or there are four different ways of creating a passive investment strategy in the INDIAN context:
One can have a passive approach even in direct equities, by buying all the index stocks in the same proportion as the index. By this, portfolio performance will approximately reflect the performance of the index over a longer period of time. But this becomes difficult for an individual as he will have to track index changes, weight changes, etc.
There is a simpler way to perform the above function is by buying index funds, offered by many mutual funds in India. Everything here will be done by the experts and the individual need to be worried about keeping a track of anything.
Another option available here is ETF (Exchange Traded Funds), these vary slightly from index funds. Just like index funds, ETF also creates a portfolio of index stocks in the same proportion. The only difference is that ETFs are listed, and can be bought and sold in any recognized stock exchange.
Another slight variant of passive investing is buying and holding a portfolio of dividend yield stocks. In this, dividends are tax-free in the hands of investor up to Rs.10 Lakhs per year. Volatility risk is quite low under this type of investment.
Passive investing makes sense when one does not want to bear higher risks and want to reduce the costs of maintaining a portfolio in the long run.
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