What makes passive funds a smart choice for long-term investors?

Synopsis

Fund houses are increasingly launching passive funds, including ETFs and index funds, which replicate market indices for low-cost, diversified exposure. These funds are gaining traction as large fund houses expand their offerings, particularly in equity indices like Nifty 50 and S&P 500.

Fund houses are making several launches in the passive space, where portfolios merely mimic the underlying index. They are gaining popularity as they offer a simple and low-cost way to gain exposure to a broad, diversified portfolio.

WHAT IS A PASSIVE FUND?

A passive fund tracks the performance of a market index by buying the same stocks or bonds as the index. The two types of passives are exchange traded funds (ETFs) and index funds. These funds aim to replicate the investment returns of particular benchmark indices by holding a securities portfolio that closely mirrors the index’s composition. They are called passive funds as there is no fund manager involvement in choosing any stock in the scheme.

WHY ARE THERE A SLEW OF PASSIVE LAUNCHES THESE DAYS?
The markets regulator Sebi specifies that a fund house can have only one scheme in each category. With large fund houses having exhausted their actively managed categories by launching a scheme in each, they are now slowly adding passive schemes to build their presence there

WHAT INDEX FUNDS ARE AVAILABLE IN INDIA?

Equity index funds dominate the scene. The most popular are those tracking the Nifty 50, S&P BSE Sensex, Nifty 100, Nifty Midcap 150, Nifty Smallcap 250, Nifty 500, Nifty Total Market, and BSE 1000. Global flavours are available too, with funds pegged to the Nasdaq 100 and S&P 500. For those looking at specific sectors, there are index funds targeting IT, pharma, consumption, manufacturing, and more. But the star of the show in India remains the Nifty 50 index fund.

WHEN DO PASSIVE FUNDS OUTPERFORM ACTIVE FUNDS?

Passive funds tend to shine when markets are efficient and opportunities for stock-picking are scarce. Their low costs give them an edge, but the real kicker comes when market rallies are driven by a handful of heavyweight stocks—think narrow leadership—leaving active fund managers struggling to keep pace, especially when stretched valuations make selective bets tricky. In such times, simply tracking the index often proves to be the smarter, more consistent approach.

WHO SHOULD USE PASSIVE FUNDS? WHAT ADVANTAGES DO THEY OFFER?
Passive funds, with their low costs and no fund manager bias, are ideal for investors who want simple, broad-based equity exposure without worrying about which scheme or manager to pick. They’re suited for those with a long-term horizon—10 years or more—who prefer a steady, hands-off approach and want to avoid risks like manager churn or sudden shifts in a fund’s strategy.

WHO COULD IGNORE THE PASSIVE CATEGORY?
Passive funds aren’t for everyone. Since they blindly track an index, fund managers can’t avoid stocks they dislike or hold cash when markets look pricey. Investors chasing alpha (returns above the benchmark), willing to take higher risks, and comfortable managing their portfolios may prefer active funds, or choose to keep passive allocations small.