With increasing market volatility and underperformance of many active funds, passive investing has gained serious momentum. Passively managed funds include index funds and exchange-traded funds (ETFs), which are becoming a preferred investment choice among Indian investors.
These funds aim to replicate the performance of a benchmark index like the Nifty 50 or Sensex, offering a simple and cost-effective way to build wealth. Here’s a look at the key advantages of investing in passively managed funds.
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Advantages of Investing in Passively Managed Funds
The goal of passive investing is to minimise the expenses associated with mutual fund investing and focus on long term growth. The benefits of investing in these funds are:
1. Lower Costs
One of the most attractive benefits of passively managed funds is their low expense ratio. The operational cost is significantly reduced, as these funds do not require active fund management or research teams.
For example, the average expense ratio for actively managed equity mutual funds in India is around 0.75%, whereas most index funds and ETFs, including the UTI Nifty 50 Index Fund, have an expense ratio as low as 0.17%. That difference can add up significantly over time, especially for long-term investors.
2. Consistent, Market-Like Returns
The goal of passive funds is to match the market, not outperform it. While this may sound limiting, the reality is that many active fund managers struggle to outperform their benchmarks consistently.
By simply tracking an index, passive funds often end up delivering better or comparable returns over the long run — without the high costs or risks of active management.
3. High Transparency
With passive funds, you always know what you’re investing in. The portfolio of a passive fund is publicly available and closely mirrors the benchmark index.
This transparency makes it easier for investors to track performance, understand risk exposure, and take better control of their investment decisions.
4. Ease of Access
The Indian MF industry is actively expanding its passive offerings with various Nifty 50 mutual funds. In FY24, over 130 new passive schemes were launched, including 44 ETFs and 90 index funds.
This gives investors a wide range of options across equity, debt, sector-specific indices, and even global markets — all accessible via regular mutual fund platforms or brokerage apps.
5. Strong Short-Term Performance
Passive funds have delivered strong returns in recent periods. In the first half of 2024, some of the top-performing index mutual funds and ETFs generated returns as high as 36%, due to a strong rally in large-cap and sectoral indices.
While past performance doesn’t guarantee future results, the numbers indicate that passive funds can be a solid performer in both bullish and range-bound markets.
6. Favourable Taxation
The Union Budget 2024 introduced changes that make passive investing more attractive from a tax perspective. The holding period for long-term capital gains tax on equity mutual funds has been reduced from 36 months to 24 months, with the tax rate being 12.5%.
This move enhances the post-tax returns for investors in passive funds, especially those planning for medium- to long-term goals.
Which is Better: Investing in Passive Funds or Active Funds?
The choice between passive and active funds depends on your investment goals, risk appetite, and market outlook.
| Criteria | Passive Funds | Active Funds |
| Objective | Mirror a benchmark index | Outperform the benchmark |
| Cost | Low expense ratio (0.1% – 0.5%) | Higher expense ratio (1.5% – 2.5%) |
| Performance | Consistent, index-linked returns | Performance varies based on fund manager |
| Risk | Market risk only | Market + fund manager risk |
| Transparency | High–portfolio mirrors index | Medium – depends on disclosure |
| Ideal For | Long-term, cost-conscious, DIY investors | Investors seeking alpha with higher risk tolerance |
Conclusion
Passively managed funds are no longer just a fallback option. With their consistent performance, cost-effectiveness, and ease of use, they’ve become a smart addition to modern portfolios. For investors looking to build long-term wealth with low maintenance, high transparency, and broad diversification, passive funds tick all the right boxes.
