Cost less than active funds since they don’t invest in large research desks, or brokers and dealers.
Super returns of an passive fund
With index fund, you also get the benefits of the dividends declared and the bonus shares issued as you hold the index.
Adding this all up, over time it gives you super returns
Safest way to get average market returns
If you don’t want the risk of having a managed fund, and are frozen between direct stocks and market-linked products such as unit-linked insurance plans (ULIPs), mutual funds:
Choose an exchange-traded fund (ETF) or an index fund linked to a broad market index or a mid-cap index.
Benefits of a passive fund
An average equity active fund costs 2% of the returns every year.
The cheapest ETF only costs 0.03%.
Over a long period of time (~20 years), the difference in cost will be significant if your managed fund does not beat the index significantly.
Types of passive funds
Index fund
Exchange traded fund (ETF)
Tracks the index and invests as a mutual fund
Tracks an index like the Sensex but lists its units on a stock exchange unlike a mutual fund.
No demat account needed
Need a demat account
Buys at the price at the end of the day
Can buy at any point in the day (The difference in the price of the index between a given point in the day and the price at the end of day is not relevant to retail investors like us)
Costs between ten basis points to 1% (ten paise to Rs 10 on every Rs 1000 invested)
Extremely cheap. Price can be as low as one basis point (one paise for every Rs 1000 invested)
Liquidity may not be good. When you want to sell a large quantity, you may not get the current market price