What is Passive Portfolio Management? Pros, Cons & Examples

July 4, 2022
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Passive Portfolio Management just replicates a wide market’s performance. Building a portfolio and filling it with the same investments as a wide market index is required. A professional portfolio manager’s function in this situation is highly constrained. This approach is far more laid-back and relaxed than aggressive portfolio management.

Sit Back and Your portfolio will adjust as per the market index.

Every portfolio wants to deliver good returns, Just like Active Portfolio, This passive portfolio has the same aim.

A Passive Portfolio does not have a specific benchmark because it just produces a mirror reflection of its benchmark.

Example: Nifty 50 consists of 50 Stocks so any mutual fund manager who follows a passive portfolio strategy will invest in the same stocks which are in Nifty 50 corresponding to their weightage.

Any Fund that is using Nifty 50 or Sensex as a key phrase in their fund name. You should read and understand by these terms that they are following the passive portfolio strategy. since they are following a passive portfolio strategy their fund managers don’t have to work a lot as they are just copying the stocks that are part of Sensex or Nifty 50 since they are just replicating the stocks their management or exit load fees are also less.

Deep Down Passive Portfolio Strategy

No effort is taken in passive investment management to separate appealing from unattractive assets, anticipate their prices, timing markets, or target specific market sectors.

Since they invest in a variety of asset types, passive managers anticipate averaging results. A large category of securities acting similarly in the market, such as equities, fixed-income securities, and cash equivalents, is referred to as an asset class.

Advocates of a passive portfolio approach contend that investing in index funds, which have consistently outperformed the majority of actively managed funds, is the best and risk-free method. This kind of investing involves very little portfolio management on the part of the investors.

Pros of Passive Portfolio

Well, This portfolio needs less effort from the human brain or analytical skills and You can have diversification.
As the Fund manager needs to copy stocks right from the index therefore management fees are less.
Less analytical skills are needed as compared to an active portfolio strategy.
Easy to invest in and available to retail investors.
It follows the Buy and Hold approach which automatically lowers the transactional charges.

Cons of Passive Portfolio

Since this strategy just replicates the index, so you have to accept the fact that what is happening to the market, the same thing will happen to your portfolio.
This passive portfolio will give you a good return but not a great one.
For a long period, you will be in a profitable phase but you need to show patience during the ups and downs of the market.

Final Words

Since it is hard to constantly outperform the market, many investors think that passive management is a sound idea. Investors favor passive management as a consequence to ensure maximum profits. A typical investor makes more money over the long term by reducing management expenses than by beating the market as a whole.

Since Passive portfolio management involves less selling and buying of financial instruments it means you are not giving extra transactional fees. Warren Uncle will be proud of you.

We hope We gave you some insights about the Passive Portfolio strategy and delivered it in the best possible way.

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