You might have come across many investors actively buying and selling securities in the market. Intraday traders are buying and selling stocks repeatedly within a single day to benefit from price fluctuations. Besides these active investors, one can also find investors holding securities for the long term. Passive investors benefit from the appreciation of the financial instrument with time. ETFs (Exchange Traded Funds), passive mutual funds, and related instruments are gaining hype in the market. Are you wondering how to start your passive investment journey? Continue reading to learn the basics to start your passive investment journey.
What Exactly is Passive Investment?
Passive investment strategies do not involve buying and selling assets repeatedly. Instead, the investors hold a portfolio of assets for the long term. For instance, many passive investors prefer Index Tracking. They might invest in ETF schemes tracking the performance of market indices. An ETF replicates the performance of a popular market index. When the constituents of the market index do not change, the ETF scheme remains invested in the same assets for the long term. Passive investors also prefer passive mutual funds, target date funds, managed portfolios, CDs (Certificates of Deposit), and high-yield savings accounts.
Passive investors believe that it is challenging to outperform the market every time. You might fail to interpret market conditions and lose the trading capital. Instead of trying to outperform the market, passive investors try to earn returns through the long-term growth of assets. The cost of investments is usually low for passive investors. Active investors incur higher costs due to repeatedly selling and buying securities. However, passive investments are also associated with low portfolio turnover. However, a passive investment can help build substantial wealth over time.
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Understanding the Benefits of Index Tracking
Several passive investment instruments are available in the market, from ETFs to high-yield savings accounts. However, most investors prefer index tracking, as it is readily available. You can find numerous ETF schemes based on different market indices. Here are the pros of index tracking for passive investors:
- ETFs or index mutual funds invest in a diversified portfolio. The fund portfolio consists of different assets, similar to the index it tracks. Portfolio diversification is a proven strategy for maximizing returns and minimizing risks.
- Index mutual funds or ETFs have lower investment costs. For instance, an actively managed mutual fund will have a higher expense ratio, as the fund manager makes day-to-day decisions. On the other hand, ETFs only track the performance of existing market indices, thus leading to lower costs.
- Index mutual funds or ETFs might not outperform the market at all times. However, the portfolio value will increase with time. You can earn better returns by staying invested in a passive investment scheme.
- ETFs and index mutual funds are readily available to investors. The same cannot be said for CDs, managed portfolios, and other passive investments.
Some Tips to Start Your Passive Investment Journey
Here are some tips for beginners looking to implement passive investment strategies:
- There might be times when an ETF or an index mutual fund fails to perform as per expectations. It might happen due to market downs, economic conditions, or other reasons. You must stay invested to benefit from long-term market appreciation.
- Don’t waste time, as it is essential to start early with passive investments. ETFs, index mutual funds, and other schemes allow you to benefit from compounding, where returns are re-invested. The earlier you start, the more you can benefit from compounding.
- ETFs strictly replicate the performance of market indices. It means an ETF scheme does not consider other investment opportunities in the market. Passive investors only focusing on ETFs might miss out on some opportunities in the market.
- You can set automatic payments at regular intervals in an ETF scheme to benefit from compounding. Automated payments can help maintain discipline while investing passively.
In a Nutshell
Passive investment can help investors benefit from long-term market appreciation. Index tracking is usually preferred by beginners trying out passive investment strategies. You can find ETF schemes, passive mutual funds, CDs, and other instruments. Investors must try a blend of active and passive investment strategies for better returns. It will help mitigate market risks and earn guaranteed returns over time. Learn more about passive investment right away!
