Passive Fund Management

When an investor goes for an actively managed mutual fund, investors leaves the decision of investing to the professional fund manager. The fund manager is the decision maker as to which company or instrument to invest in. Sometimes such decisions may be right, rewarding the investor handsomely. However, possibilities are that the decisions might go wrong or may not be right all the time which can lead to considerable losses for the investor.

There are mutual funds that propose Index funds whose objective is to compensate the return given by a select market index. Such funds follow a passive investment style. They do not analyze companies, markets, economic factors and then narrow down on stocks to invest in.

As an alternative they prefer to invest in a portfolio of stocks that imitate a market index, such as the CNX Nifty 50 index. The returns fetched by the index are the returns given by the fund. No attempt is made to try and beat the index. Research results has shown that most fund managers are unable to continually beat the market index year after year. Also it is impossible to identify which fund will beat the market index.

Therefore, there is an aspect of going wrong in selecting a fund to invest in. This has lead to a huge interest in passively managed funds such as Index Funds where the choice of investments is not left to the judgment of the fund manager. Index Funds hold a diversified basket of securities which represents the index while at the same time since there is not much active turnover of the portfolio the cost of managing the fund also remains low. This gives a dual advantage to the investor of having a diversified portfolio while at the same time having low expenses in fund.