Passive funds: All you need to know

Summary: Want steady market returns without the stress of active stock picking? Passive funds offer a simple, low-cost way to track market indices like Nifty and Sensex while keeping your expense ratios minimal. Here, we've got everything you need to know about getting started. Passive mutual funds are funds which replicate a market index like the Nifty or Sensex. These funds invest in the constituents of the selected market index in the same proportion as they are present in the index. Fund managers of passive funds do not conduct any research to pick stocks that can be part of their portfolios. For example, a passively managed fund tracking the Sensex will invest in the stocks of 30 companies that make up the index in the same proportion.​ As compared to active funds, these funds charge lower fees since they do not need to conduct in-depth research to select stocks. With these funds, you can opt for a cost-efficient way to diversify your portfolio and get exposure to a wide spectrum of market segments. With the rising popularity of passive mutual funds in India, you can not only diversify your portfolio but also get returns that match the market.​ How do passive funds work? Passive investing revolves around choosing a market index and forming its replica by investing in the same stocks in a similar proportion as the index. After that, the fund starts tracking the index closely and making changes to the portfolio as per the underlying index in order to make the fund closely identical to the index. When it comes to passive funds, there is no process related to selecting stocks, as the stocks of these funds are similar to those of their underlying indices. Therefore, fund managers play a limited and passive role, which is the ultimate meaning of passive funds. Different types of passive funds Index funds Index funds are passively managed mutual fund schemes that replicate specified market indices. These funds can be bought and sold like any other mutual fund scheme and work in the same manner. In passive index funds, the weightage of all stocks is similar to that of the underlying index. If a stock's weight in the underlying index changes, the fund manager also buys or sells units to match the weightage of the index. However, these funds do not always yield the same results as their underlying indices because of tracking errors. These happen when it is difficult to hold the securities of indices in similar proportions. Nevertheless, these funds are appropriate for those investors who want exposure to the broader market without investing in stocks or mutual funds directly. Exchange-traded funds (ETFs) ETFs are passively managed schemes replicating specified market indices. However, unlike traditional mutual funds, units of ETFs are traded on the stock exchange like equity shares, and their price varies based on the NAV

This article was originally published on July 26, 2023, and last updated on February 02, 2026.