Passive Investment Funds - Meaning, Benefits and How to Invest?

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:

1. 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).

      

2. 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.

    

3. 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 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:

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:

1. 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.

      

2. 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.

    

3. 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.

    

4. 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.

      

5. 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.

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. 

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.

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.