BIZ ~ COM
Given the improved financial understanding of investors, passive funds, with their core strength of transparency, lower expense ratios, unbiased approach and simplicity are only expected to grow further. Their fast-increasing popularity, largely attributed to the above strengths has even led to the emergence of sectorial/thematic passive funds. While the growth of passive funds indicates a new sense of maturity amongst the audiences, it is imperative for investors to understand passive investing aims to match the performance of the chosen index. This approach is grounded in the belief that markets are efficient over the long run.
The Role of Patience in Passive Investing
Investing is often described as a journey, and patience is the key to success on this journey. A myopic approach to investing can often derail the investor from his/her financial objective. The market can be volatile in the short term, and it is not uncommon for passive investors to experience periods of underperformance. However, staying invested for the long term allows investors to weather market fluctuations, benefiting from the power of compounding and capturing the overall growth of the economy.
Becoming actively ‘Passive’:
It is important to be patient and disciplined when investing passively. Passive investing can be considered as a more hands-off approach and an ideal pathway for those who lack in-depth financial knowledge and yet are looking to build a simple but diversified high quality portfolio through their investments. This ensures more financial stability and security in the long run.
Diversification through Benchmark Exposure: Stronger regulatory focus to develop the investing landscape in India coupled with the emergence of global themes has opened the floodgates for single or multi-factor thematic investments such as consumption, quality, low volatility etc.
Better Risk-Return Trade-off: While all forms of investments come with a certain level of risk, passive funds follow broad-based market indices and hence are more easily understandable from a risk perspective.
Leverage the trading ease of ETFs: Apart from index funds, ETFs too are a favourable option for investors seeking a convenient method for investing in a particular basket of stocks (represented by an index). ETFs have a significant advantage that they are listed and traded like individual stocks in the stocks market.
Investors resonate better with Smart-Beta ETFs due to the ability to target the portfolio along certain style. Although it is yet to gain the necessary traction in India, its increased acceptance will be crucial from the passive investing paradigm.
Changing times and evolving investor needs demand innovation in every aspect of investing, be it offerings or channels. Today, market has multiple opportunities for investors across the board. The biggest mistake one can make at this juncture is not investing in the market due to some pre-conceived notions. Having emerged as the fifth largest economy, India is well on path to be amongst the top three economies in the next few years. The opportunity to leverage is now. The passive universe offers multiple approaches if they wish to get on the growth bandwagon.
Ashwin Patni, Head Products and Alternatives, Axis AMC
