Investments always come with fruitful returns if investors choose the right way. Today, we are going to demonstrate two broad ways of investment strategy, one is active and the other is the passive investment strategy. Investors often become confused between active and passive investment. Here, the importance, features of the strategies will be explained.
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, 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 passive investment and the other one is active. The breakdown of how these two differ from one another is given below:
As the name suggests, it is an active investment strategy where an investor constantly monitors the market and invest 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.
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 of the destination is quite a time consuming but low risk.
Features of Active and Passive Investment
- One of the main objectives of active money management is to beat the inflation rate by taking the full advantage of short-term price fluctuations.
On the other side, passive investment 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 returns while passive investors deal with predictable and risk free return.
Passive Investment Options
In India, there are plenty of passive investment 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, Index fund. Smallcase etc.
This is one of the most common and risk-free passive investments in India. Generally, most of the 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 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. It can be bought and sold like stocks. It is one of the most low-cost instruments.
Index fund is almost similar to ETF, track a particular index. The only difference between the two is for ETF one need 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 is such an instrument which passively track and invest in a theme, idea or sector. The thematic instrument centered around ideas like housing, GST, rising rural demand, etc. So, mainly smallcase is a portfolio of stocks which build around a specific idea, 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.
To access smallcase open Account in Zerodha.
These are some of the popular passive investment strategy in India. This helps investors to get constant gain from the market.