Why in the News?
Passively Managed Funds—those that track a market index without active stock selection—have become increasingly popular among investors seeking low-cost, predictable returns.
About Passively Managed Funds:
- Passively managed funds, commonly known as passive funds, are investment vehicles designed to replicate the performance of a specific market index, such as the Nifty Fifty or the Sensex.
- Unlike actively managed funds, the fund manager in a passive fund does not select stocks or make frequent buy-and-sell decisions.
- Instead, the fund holds the same stocks in the same proportion as the underlying index.
- How Passive Funds Work?
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- These funds track a benchmark index by investing in all or a representative sample of the securities in that index.
- The objective is to mirror the index’s returns, not to outperform it.
- As a result, they incur lower management costs and have minimal portfolio turnover.
Types of Passive Funds:
- Index Funds:
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- These are mutual funds that can be purchased or redeemed directly from the fund house.
- Transactions are processed only once a day, based on the day’s closing Net Asset Value.
- They offer ease of use and are suitable for systematic investment plans and long-term investors.
- Exchange Traded Funds:
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- These are funds listed on stock exchanges, like the National Stock Exchange or the Bombay Stock Exchange.
- Investors buy or sell units during trading hours through brokers, just like stocks.
- They require a dematerialised account and are suitable for investors seeking intraday trading flexibility.
Advantages of Passive Funds:
- Low Expense Ratios: Because no active research or trading is involved.
- Transparency: Holdings closely follow a well-known index.
- Diversification: Spreads investment risk across multiple securities.
- No Human Bias: Avoids mistakes due to the fund manager’s poor decisions.
Limitations:
- No Outperformance: Returns will always be close to the index and cannot exceed it.
- Tracking Error: Slight variation between the fund’s performance and the index due to operational reasons.
- Limited Flexibility: Cannot adapt to sudden market downturns.
| [UPSC 2025] Consider the following statements:
Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders. Statement II: Bondholders are lenders to a company, whereas stockholders are its owners. Statement III: For repayment purposes, bondholders are prioritised over stockholders by a company. Which one of the following is correct in respect of the above statements? (a) Both Statement II and Statement III are correct, and both of them explain Statement I * (b) Both Statement I and Statement II are correct, and Statement I explains Statement II (c) Only one of the Statements II and III is correct and that explains Statement I (d) Neither Statement II nor Statement III is correct |
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