6 Factors to consider when selecting a Passive Mutual Fund

Unlike Active Funds, Passive Funds do not require constant monitoring. They replicate the composition and performance of indexes such as Nifty 50 and Sensex. Hence, they garner lower managing costs. Over the years, Passive Funds have gained significant popularity. Since they are simple and effective, many investors turn to them when they have time constraints. They usually refer to these factors when selecting:

Pricing inefficiency in ETS

Exchange Traded Funds are one among the types of Passive Funds. Since they are traded on the exchange, their price is often dynamic. For example, there could be a price difference between the ETF’s Net Asset Value and its market price. Hence, you should verify the exact amount before buying it on the exchange.

Tracking error

It refers to the difference between the fund returns and the index returns. Although Passive Funds like ETFs or Index Funds track a benchmark index’s performance, it is not always possible to mimic the same performance. Therefore, avoid a Passive Mutual Fund with relatively higher tracking errors. If you come across two funds with the same number of tracking errors, opt for the fund house with more experience.

Appropriate scheme

Before you invest in a Passive Fund, carefully assess your risk appetite. While broad-based indexes may offer good returns, some investors may not be able to bear the volatility of small-cap or mid-cap ETFs or Index Funds. Others may not fully understand the workings of relatively new avenues like smart-beta funds.

It is a widely observed phenomenon that investors do not lose their money because of a poor-performing fund. Instead, they bear losses when the fund does not match their risk profile. Hence, it is best to consider how comfortable you are with the format and the possible risks of a Passive Fund.

Expense ratio

Index Funds are the best Passive Funds since they have a lower expense ratio than regular Mutual Funds. Having said that, you need not invest in an Index Fund simply because it is affordable. While selecting, you should consider the fund’s track record besides its expense ratio.

Fund house

The fund house in question is also a factor you should consider when making a pick. You want to go with one which is reputable and known for its efficiency.

Benchmark

Various benchmark indices are available to investors. Despite such availability, you should select an index that meets your diversification needs. For instance, the Nifty 50 Index consists of 50 stocks across different sectors. On the other hand, the Nifty 100 comprises 100 stocks. If you wish to gain better access to the market, opt for the Nifty 100 Index.

Also, review the index constituents. If you are looking for exposure in the IT sector through Passive Funds, go over the stocks listed in the different IT indices.

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