Passive investing has increasingly become very popular for those who want to avoid the hassle of picking shares and paying hefty fees to traditional active fund managers. In a passive fund, the fund manager makes only minor periodic adjustments to keep the fund in line with its index.
1. Low cost. Finding a fund manager who can beat the market is a gamble and can cost a lot of money. Index tracking funds generally have very low fees and operating expenses as compared to active funds. A number of DIY platforms are extremely user-friendly and incur very low charges for investing in passive funds.
2. Diversification. It is essential to maintain a well-diversified portfolio for a successful investment plan and indexing can be an ideal way to achieve diversification. Index funds provide a broad spread of risk because they hold all of the securities in their target benchmarks
3. Simplicity. It is extremely simple to invest in a passive fund. More and more DIY platforms offer step by step advice and instructions for new investors. There is no need to select and monitor individual managers, or chose between investment themes.
4. Outperformance. A recent study from Vanguard Asset Management shows low cost funds outperform high cost funds. While a number of active fund managers outperform, it is not always easy to find one. We live in a low interest rates and QE-driven world, which has given a boost to index trackers.
5. Risks. It can be said that trackers are exactly what you pay for. When markets rise, trackers tend to fare better but when bear markets bite, trackers slip down the fund performance league tables. Also, these funds offer lesser flexibility since index fund managers are usually prohibited from using defensive measures such as moving out of shares, even if the manager thinks share prices are going to decline.
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