Best Passive Mutual Funds in India
Passive funds in India aim to replicate the performance of a market index, such as the Nifty 50 or Sensex, by investing in the same stocks in the same proportion.
Passive Mutual Funds
Friday, 14 March, 2025
| Name | Sub Category | AUM (Rs. in cr.) | Expense Ratio (%) | CAGR 10Y (%) | Tracking Error (%) | NAV (Rs.) | Exit Load (%) |
|---|---|---|---|---|---|---|---|
| Quant ELSS Tax Saver Fund | Equity Linked Savings Scheme (ELSS) | 10,979.71 | 0.59 | 22.35 | 7.49 | 415.1 | 0 |
| ICICI Pru Thematic Advantage Fund | FoFs (Domestic) - Equity Oriented | 1,989.95 | 0.54 | 19.85 | 6.64 | 228.2 | 1 |
| Bank of India ELSS Tax Saver | Equity Linked Savings Scheme (ELSS) | 1,435.90 | 0.84 | 18.31 | 7.97 | 202.39 | 0 |
| DSP ELSS Tax Saver Fund | Equity Linked Savings Scheme (ELSS) | 16,841.49 | 0.75 | 17.29 | 3.12 | 154.67 | 0 |
| JM ELSS Tax Saver Fund | Equity Linked Savings Scheme (ELSS) | 183.48 | 1.27 | 17.19 | 6.23 | 57.21 | 0 |
| Bandhan ELSS Tax Saver Fund | Equity Linked Savings Scheme (ELSS) | 6,900.19 | 0.64 | 16.78 | 3.32 | 174.47 | 0 |
| Tata ELSS Tax Saver Fund | Equity Linked Savings Scheme (ELSS) | 4,680.10 | 0.7 | 16.61 | 3.23 | 51.58 | 0 |
| Kotak ELSS Tax Saver Fund | Equity Linked Savings Scheme (ELSS) | 6,148.14 | 0.61 | 16.33 | 3.63 | 138.69 | 0 |
| Invesco India ELSS Tax Saver Fund | Equity Linked Savings Scheme (ELSS) | 2,918.68 | 0.76 | 16.26 | 4.11 | 154.83 | 0 |
| Franklin India Feeder - Franklin U.S. Opportunities Fund | FoFs (Overseas) | 3,513.79 | 0.61 | 16.05 | 0 | 85.26 | 1 |
Disclaimer
Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The data is taken on 6th December 2024 from Tickertape Mutual Fund Screener. The list is sorted based on the funds’ 10-yr CAGR.
About Passive Mutual Funds
Passive investing has become an important part of the modern investment landscape, offering individuals an opportunity to invest in a simple and cost-effective manner. By understanding passive funds, you may gain insights into how they work, their benefits, and their limitations. This can help you make informed decisions and determine whether passive investing aligns with your financial goals.
What Are Passive Funds?
Passive funds are a type of investment fund designed to replicate the performance of a specific market index, such as the Nifty 50 or Sensex. These funds aim to match the market’s returns rather than outperform it. Their main purpose is to provide investors with broad market exposure at a lower cost compared to actively managed funds.
Purpose of Passive Funds
The primary goal of passive funds is to track the performance of an index by holding the same securities in the same proportions. This approach eliminates the need for frequent trading and active decision-making, making it a more straightforward investment option.
Passive Funds Vs. Active Funds
Passive funds are often compared with active funds, as the two represent contrasting approaches to investing.
| Feature | Passive Funds | Active Funds |
| Management Style | Follow a benchmark index with no active intervention by fund managers. | Fund managers actively select securities to outperform the market. |
| Objective | Achieve returns in line with the performance of the underlying index. | Generate returns higher than the benchmark index. |
| Costs | Lower expense ratios due to minimal trading and management. | Higher expense ratios owing to active management and research costs. |
| Risk | Generally lower as they mimic an index, avoiding speculative decisions. | Higher as fund managers take active positions that may or may not succeed. |
| Performance | Matches the market’s performance (no attempts to beat the market). | May outperform or underperform depending on fund manager decisions. |
| Transparency | Highly transparent as the portfolio replicates the index composition. | Less transparent as active funds often change allocations based on market conditions. |
| Flexibility | Limited flexibility to react to short-term market changes. | High flexibility to respond to market fluctuations and opportunities. |
By understanding the differences between these two approaches, you can evaluate which aligns better with your investment preferences and risk tolerance.
How Passive Funds Work?
Mechanism of Tracking Market Indices
Passive funds are structured to mirror the composition and performance of a specific index. For example, a Nifty 50 index fund will invest in all 50 stocks in the same proportions as they are in the index. This approach helps ensure that the fund’s performance closely matches the index’s returns.
Role of Fund Managers in Passive Investing
In passive funds, the role of fund managers is limited to maintaining the alignment of the portfolio with the index. This involves periodic rebalancing to reflect changes in the index, such as the inclusion or exclusion of stocks.
Investment Strategy
The strategy of passive funds focuses on replicating specific market segments rather than outperforming them. This reduces the complexity of investment decisions and aligns the fund’s performance with the broader market.
Types of Passive Funds
Index Funds
Index funds are mutual funds that aim to replicate the performance of a specific market index, such as the Nifty 50 or Sensex. These funds are passively managed, offering broad market exposure and lower fees compared to actively managed funds. Index funds are ideal for long-term investors looking for diversified and steady market returns.
Exchange-Traded Funds (ETFs)
ETFs track market indices but are traded on stock exchanges like individual stocks. They combine the characteristics of mutual funds and stocks, providing high liquidity and flexibility. Investors can trade ETFs throughout the day at market prices, making them cost-effective and suitable for both short-term and long-term strategies.
Fund of Funds (FOFs)
FOFs are mutual funds that invest in other mutual funds, offering diversified exposure through a single investment. These funds simplify portfolio management and reduce risks associated with individual funds. FOFs can include domestic and international funds, providing access to multiple asset classes for investors seeking convenience and diversification.
Equity Linked Savings Scheme (ELSS) Funds
ELSS funds are tax-saving mutual funds that invest primarily in equities. These funds come with a mandatory three-year lock-in period and are eligible for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh. ELSS funds provide the potential for high returns by investing across various sectors and market capitalisations, making them an attractive option for tax-conscious, growth-oriented investors.
Advantages of Passive Investing
- Cost Efficiency: Passive funds generally have lower expense ratios than active funds due to minimal trading and management.
- Diversification: By investing in passive mutual funds, you can gain exposure to a wide array of assets and sectors, reducing the impact of individual stock or sector performance on your portfolio.
- Simplicity: Passive investing eliminates the need for frequent decision-making, making it easier to manage, especially for new investors.
Disadvantages of Passive Investing
- Limited Flexibility: Since passive funds replicate indices, they cannot adjust their holdings in response to short-term market opportunities or risks.
- Over-Exposure to Specific Sectors or Stocks: If an index is heavily weighted toward certain sectors or stocks, a passive fund tracking that index may become over-exposed to those areas.
- No Opportunity for Outperformance: Passive funds aim to match, not beat, the market’s performance. This may not appeal to investors seeking higher returns during market upswings.
Strategies for Investing in Passive Funds
- Identify Objectives: It is important to define your financial goals, such as saving for retirement, education, or other milestones, to guide your investment choices.
- Diversification: Allocating investments across different asset classes and regions may help reduce risks while improving your portfolio’s stability.
- Assess Risk Tolerance: Understanding your comfort level with market volatility can help you select the right mix of passively managed funds.
- Long-Term Focus: Passive investing often works best over the long term, as it aligns with broader market trends. Staying invested through market fluctuations may help you achieve your financial goals.
- Monitor and Rebalance: Regularly reviewing and rebalancing your portfolio may ensure that your investments remain aligned with your objectives and risk profile.
To Wrap Up..
Understanding passive funds definition and the types of funds available can help you decide if passive investing fits your needs. While they offer simplicity, cost-efficiency, and broad market exposure, they also have limitations such as limited flexibility and no opportunity for market outperformance. Evaluating your goals and risk tolerance is key to determining whether passive index fund investing is the right choice for you.
Can't decide which stocks to pick?
smallcase offers 500+ readymade stock baskets, created and managed by SEBI-registered investment experts
Try smallcase
Discover ready-made stock baskets on smallcase
smallcase offers simple, quick & delightful investing for you with 200+ readymade stock baskets, created and managed by SEBI-registered investment experts
Frequently Asked Questions About Passive Mutual Funds
What are passive funds and how do they differ from active funds?
Passive funds, also known as passive investment funds, are designed to replicate the performance of a specific market index. Unlike active funds, where managers actively select stocks based on research and market analysis, passive funds follow a buy-and-hold strategy with minimal trading. This can result in lower fees and expenses associated with management.
What is the meaning of passive index investing?
Passive index investing refers to a strategy where investors purchase shares in passive index funds that track a particular market index. The goal is to achieve returns that closely match those of the index over time.
What is tracking error in passive funds?
Tracking error refers to the difference between the performance of a passive fund and its benchmark index. A low tracking error indicates that the fund is successfully replicating the performance of the index, which is crucial parameter for passive funds.
What is the difference between active and passive funds?
Active funds are managed by professional fund managers who actively select securities in an attempt to outperform a benchmark index. They involve higher management fees and carry greater risks due to reliance on the manager’s decisions. In contrast, passive funds aim to replicate the performance of a specific market index by investing in the same securities in the same proportions, resulting in lower fees and lower risk compared to active funds.
Are passive funds safe?
Passive funds are generally considered safer than active funds because they track market indices, which reduces the risk associated with individual stock selection and market timing. However, they are still subject to market risk; if the overall market declines, so will the value of passive funds. Consult a professional before investing.
What are the performance goals of active versus passive funds?
The primary goal of active funds is to outperform a benchmark index, potentially delivering higher returns if the fund manager makes successful investment decisions. Conversely, passive funds aim to match the performance of their benchmark index, offering returns that closely follow market movements without attempting to exceed them.
