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Passive investment funds are index mutual funds or ETFs that do not try to beat the market. Instead, they replicate how a market index (say the Nifty 50 or Sensex) performs. These funds invest in the “same companies” and in the “same proportion” as the index they follow. For example, if a Company “A” is part of the Nifty 50, the fund also holds the Company “A” in the same ratio.
Now, because the fund only mirrors the index, the manager does not choose stocks or decide when to buy or sell. As a result, passive funds are usually lower in cost, and your returns move in line with the overall market.
So, are you also looking to invest? Read this article to first understand how passive funds work and how they differ from active funds. Next, check out their five major benefits and then explore the various passive schemes offered by Tata Mutual Fund™.
Table of Content
How Do Passive Mutual Funds Work?
The main purpose of passive funds is to follow the performance of a market index. They do this by copying the structure of the chosen benchmark. Additionally, since the goal is only to match the index, there is no need for frequent buying or selling of stocks. For more clarity, let’s see how they work:
Tracking a Market Index
A passive fund invests in the same companies and in the same proportions as its chosen index. For example,
A Nifty 50 index fund buys shares of all 50 companies included in the Nifty 50.
It even matches their weight in the index.
This may keep the fund’s returns close to the index’s performance (subject to tracking errors).
The Role of Fund Managers
Fund managers in passive funds do not select stocks based on personal judgment. Their main job is to keep the fund’s portfolio in line with the index. When the index adds or removes a company, the fund manager adjusts the portfolio to match those changes.
Investment Strategy
Always remember that the investment objective of passive funds is to mirror the market segment they track and not to outperform it. As a result, your returns may:
Reflect the “average growth of the market” and
Not be influenced by a fund manager’s skill or market timing.
Passive Mutual Funds vs. Active Funds
Passive and active mutual fund schemes are two distinct ways to invest money. They both follow different investment styles! As mentioned above, a passive fund may simply try to match the performance of a market index, but active funds try to beat their benchmark. This creates differences in:
How the fund is managed
The costs involved
To gain clarity, refer to the comparison table below:
| Feature | Passive Funds | Active Funds |
| Management Style |
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| Objective |
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| Costs |
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| Risk |
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| Exposure |
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5 Major Benefits of Passive Mutual Funds in 2025
For someone looking to build long-term wealth, passive funds may be a good starting point in 2025. They’re low-cost, easy to understand, and Broader Market based Passive Fund could give you instant diversification. To gain further knowledge, check out these five key benefits offered by passive mutual funds:
Lower Costs
Passive funds charges lower expense ratios as they do not involve constant stock research or frequent trading. Lower fees mean you keep a larger share of the market return. Let’s understand through a hypothetical example:
Assume that the market (before fees) gives a 10% return in a year.
Now, a passive fund charging 0.15% leaves you with 10.00% - 0.15% = 9.85%.
In contrast, an active fund* charging 1.00% would leave you with 10.00% - 1.00% = 9.00%.
Over the long term, this higher differential return may let you potentially build a comparatively higher corpus.
*Assumed that the active fund couldn’t outperform the market.
Easy to Understand What You Own
A passive fund holds the same stocks in the same proportions as its index and regularly publishes its holdings and weightings. That makes it easy to see which companies you own through the fund. There is no need to evaluate a manager’s strategy or track frequent changes.
Built-in Diversification
Index mutual funds (a type of passive fund) buy a broad set of stocks that form the index. That spreads your money across many businesses and sectors.
The advantage? If the share price of one company falls, the impact on your overall investment stays limited because the fund also holds many other companies. Gains or stability in those holdings may balance out the loss from a single stock.
You Get The Market’s Return Minus Small Differences
As a passive mutual fund investor, you may expect returns close to the index, minus “tracking differences” and fees. Usually, such tracking differences come from:
Fund costs
Timing of trades
Cash holdings
Minor delays when the index changes
Since the goal is to mirror the index, the performance could be more predictable in the sense that it follows the broad market trend rather than depending on a manager’s stock picks.
May Have A Lower Chance of Long-Term Underperformance
Many active funds rely on a manager’s skill and choices. If the manager picks wrong stocks or times the market poorly, the fund can lag the index for years.
Now, passive funds may remove that single point of failure. By just tracking the index, you could avoid the risk that a manager will underperform because of bad decisions.
Please note that this still does not eliminate “market risk”, but it only lowers the chance that your fund underperforms the index because of human error or poor strategy.
Some Passive Mutual Funds You May Pick for Your 2025 Portfolio
Tata Mutual Fund™ offers a range of passive investment options across different categories/types, such as:
Index Funds
Exchange Traded Funds (ETFs)
Fund of Funds (FoFs)
Each scheme allows investment through SIP or lump sum modes and is available in Direct or Regular plans, with Growth and IDCW (Income Distribution Cum Capital Withdrawal) options. Below is a list of few ETFs, FOFs, and index funds that one may consider for investing.
| Passive Funds | Product Label | Exit Load | Benchmark | Scheme Riskometer | Benchmark Riskometer |
| Tata Silver ETF Fund of Funds | An open-ended Fund of Fund Scheme investing in the Tata Silver Exchange Traded Fund. | 0.50% when redeemed on or before the expiry of 7 days from the date of allotment. | Domestic Price of Silver | Very High Risk | Very High Risk |
| Tata Silver ETF | An open-ended exchange-traded fund replicating/ tracking the domestic price of Silver | NIL | Domestic Price of Silver | Very High Risk | Very High Risk |
| Tata Nifty Next 50 Index Fund | An open‐ended scheme replicating/tracking the Nifty Next 50 Index | 0.25% of the applicable NAV, if redeemed on or before 15 days from the date of allotment | Nifty Next 50 Index (TRI) | Very High Risk | Very High Risk |
| Tata Nifty200 Alpha 30 Index Fund | An open-ended scheme replicating/tracking the Nifty200 Alpha 30 Index (TRI) | 0.25% of the applicable NAV, if redeemed on or before 15 days from the date of allotment. | Nifty 200 Alpha 30 TRI | Very High Risk | Very High Risk |
| TATA Nifty G Sec Dec 2029 Index Fund | An open-ended Target Maturity Index Fund investing in constituents of the Nifty G-Sec Dec 2029 Index.
A scheme with relatively high interest rate risk and relatively low credit risk. | NIL | Nifty G-Sec Dec 2029 Index (TRI) | Moderate Risk | Moderate Risk |
| Tata Income Plus Arbitrage Active FOF | An open-ended fund of funds investing in domestic mutual funds, including debt-oriented mutual fund schemes and arbitrage-based equity mutual fund schemes | 0.25 % of the applicable NAV, if redeemed on or before 30 days from the date of allotment. | Crisil Composite Bond Fund Index (60%) + Nifty 50 Arbitrage Index (40%) (TRI) | Low to Moderate Risk | Low to Moderate Risk |
Risk Levels of the Above Schemes
Every investment carries some level of risk, and passive funds are no exception. Check out the risk levels of each Tata Mutual Fund™ passive scheme mentioned above:
1. Tata Silver ETF Fund of Funds
2. Tata Silver ETF
3. Tata Nifty Next 50 Index Fund
4. Tata Nifty200 Alpha 30 Index Fund
5. TATA Nifty G Sec Dec 2029 Index Fund
6. Tata Income Plus Arbitrage Active FOF
Disclaimer: Investors are requested to note that they will be bearing the recurring expenses of the fund of funds scheme, in addition to the expenses of the underlying scheme in which the fund of funds scheme makes investments.
Conclusion
So now you know that passive mutual funds are mutual fund schemes that mirrors the performance of a market index (such as the Nifty 50 or BSE Sensex), rather than trying to outperform it. To do so, they may invest in the same companies and in the same proportion as the index.
In 2025, passive funds may be a good option as they potentially offer:
Lower costs compared to active funds
Simple + easy-to-understand investment structure
Diversification across multiple companies
Market-linked returns
Reduced risk of underperformance
If you are looking to invest, Tata Mutual Fund offers multiple passive investment schemes across ETFs, Fund of Funds (FoFs), and Index Funds.
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
