Passive Investment Strategy: A Quick Guide

Investments always come with fruitful returns if investors choose the strategic way. Today, we are going to demonstrate two broad ways of investment strategy, one is active and the other is a passive investment strategy. Investors often become confused between active and passive investment. Here, we will explain the importance and features of the strategies.

What is Active and Passive Investment?

While constructing an investment portfolio, one of the foremost issues that comes forward is whether to choose an active or passive investment route. Suppose you type a destination in Google, and it will show you a direct route map, you may choose it or explore some other way to reach the destination more quickly. Here, the 1st route is similar to a passive investment strategy and the other one is active. The breakdown of how these two differ from one another is given below:

Active Investment

As the name suggests, it is an active investment strategy where an investor constantly monitors the market and invests according to the current market position to get a maximum return quickly. Here, the risk is high but at the same time, inflation-beating capability is also more than the passive investment.

Passive Investment

Obviously, it is the opposite of active investment. It is a long-term investment process where investors buy and hold security over a long time. The route to the destination is quite time-consuming but low risk.

Features of the 2 Types of Investment

• One of the main objectives of active money management is to beat the inflation rate by taking full advantage of short-term price fluctuations.
• On the other side, a passive investment strategy is the most cost-effective method. There is no need for constant monitoring of the market.
• In active investment, the anxiety level of investors is quite high in comparison to passive one.
• Active investors have to deal with unpredictable gains while passive investors deal with predictable and risk-free returns.

Some Passive Investment Options

In India, there are plenty of passive investment strategy options available. Investors can get constant gains from these passive investments. Here, we will cover some of the most popular passive investment options in India. Investors follow a pre-determined strategy here.

Some of the well-known passive investment strategies are ETF (exchange-traded fund), Bank Fixed Deposit, and Index funds. Smallcase etc.

Fixed Deposit

This is one of the most common and risk-free passive investments in India. Generally, most banks offer two types of passive investment options, fixed deposits, and recurring deposits. After completing a certain time, you will be eligible to get a fixed return. One of the main advantages of fixed deposit is its risk-free nature but the disadvantage is the capability of beating the inflation rate is quite low.

Exchange Traded Fund

ETF or Exchange Traded Fund belongs to the mutual fund category. This investment option follows a specific index or asset which could be NIFTY or Gold. The fund tracks the index or asset during market hours. You can buy or sell it like stocks. It is one of the most low-cost instruments.

Index Fund

An index fund is almost similar to ETF and tracks a particular index. The only difference between the two is for ETF one needs a Demat account while index fund investment can be continued without DEMAT. The only negative point is the expense ratio is higher in the index fund in comparison to ETF.

Smallcase

Smallcase is such an instrument which passively tracks and invests in a theme, idea or sector. The thematic instrument centred around ideas like housing, GST, rising rural demand, etc. So, mainly smallcase is a portfolio of stocks built around a specific idea or theme. Only transaction fees will be deducted from the investment.

A few years back Zerodha also launched Smallcase, a thematic investment platform which has gained so much popularity among investors. It is now also available to a few other brokers.

To access smallcase open an Account in Zerodha.

Conclusion

In this post, we discussed the passive investment strategy in India. We have understood that apart from active investments the passive route is also an effective way to invest money. Hope, this article will help investors to get constant gain from the market.