Did you know that many mutual fund investors of today prefer to build their portfolios passively? Their passive funds hold a bunch of stocks or bonds that mirror a pre-constructed index. The funds are predictable, carry lower management fees than active funds, and do not rely on fund managers to deliver returns.
The passive funds’ menu offered by Indian fund houses has grown amazingly well lately, with over 300 passive funds from large and small-cap stocks, to sectors, government securities and AAA bonds spanning across assets and themes. You can mix and match them to meet your financial goals.
Investing in safe securities with passive debt funds can help you meet your financial goals like buying a car or taking a vacation in the next 3 to 5 years.
Passive funds – a good option for a new investor
Are you a new investor who’s just started earning and is looking to choose funds for your SIP investments? If you are fine with the idea of putting your money away for the long term, then you can begin SIPs in index funds tracking blue chips.
Nifty100 index funds are good funds that you can start investing with. They feature the top 100 stocks in the Indian markets and are more diversified than the Nifty50 index or Sensex 30. You won’t need to own multiple funds, as owning a Nifty100 fund will automatically help you hold a basket of 100 large stocks.
You can also buy ETFs or Exchange Traded Funds by opening a demat and broking account. The annual fees charged by these funds are in the range of 0.10-0.50 per cent.
How you can use passive funds to meet your financial goals
Below are some of the financial goals you can meet by investing in passive funds:
- Buying a car or taking a luxury vacation
Do you want to set aside money towards buying a car or taking a fancy vacation in the next four to five years? Equity funds may not be suitable for your goal, as stock market volatility makes it tough to predict your returns. But by investing in passive debt funds in safe securities, you can meet your goals.
Target maturity funds are an increasingly popular type of passive debt funds that invest in a portfolio of safe debt securities like SDLs, g-secs, PSU bonds and AAA-rated corporate bonds. Such funds reduce credit risk as well as help you minimise risks from interest rate movements. As the bonds owned by target maturity funds mature on a specific date in the future, you can know exactly when you can cash your investment.
2. Giving your child a top-quality education
If you want to plan for your child’s higher education five years down the line, then you can look at building a balanced portfolio, a mix of passive equity and debt funds allocated in the ratio of 60:40 or 70:30 as per your risk appetite.
For the equity part, you can use a Nifty100 index fund or a Nifty Midcap150 Fund for greater returns. For the debt portion, you can focus on target maturity investing in a mix of SDLs, PSU bonds and gilts. Match the maturity date of the fund with your goal’s timeline.
Looking to form a sizeable corpus for your retirement, which is less than 10 years away? You may want to invest in a debt fund to hedge against equity market volatility for your retirement portfolio. For the debt portion, you can invest in constant maturity debt funds. You can also consider fixed deposits and debt mutual funds for your retirement portfolio.
Thus, passive funds can act as a good investing instrument even for your long-term financial goals. Invest in debt funds, fixed deposits, target maturity funds and debt mutual funds to reap the benefits of passive funds.