A passive fund is where the fund manager and his team do not actively manage stocks. They mandatorily invest in the stocks that the underlying index is comprised of. They try to replicate the index and give returns according to their performance.
Passive funds are different as compared to Active Funds because they have a low expense ratio. The involvement of the Fund Manager in an Index Fund is lesser. As per SEBI regulations, the Exchange Traded Funds’ (ETFs) expense ratio cannot exceed 1% the daily net assets. ETFs generally cannot beat the benchmark. The Nifty ETF’s returns may be equal to the benchmark’s returns or lesser.
The active fund managers, in contrast, need to undertake industry research, based on which they take positions in the markets. This making active funds relatively costlier. Actively manages funds seek higher Alpha, which means they take a little more risk to generate higher returns than the benchmark. Their main objective is to beat the benchmark and if the fund manager takes a wrong decision, it can result in huge losses.
The objective of the NIFTY 50 ETF is to try and replicate the performance of the index by buying the same stocks in the same proportion as they are in the index. Nifty 50 Index includes the top 50 liquid stocks of the market. Investing in Nifty 50 ETFs gives investors diversification, which is important because it diversifies the risk factor. The Nifty 50 Index consists of the 50 most valuable stocks spanning across sectors of the Indian economy.
Many investors refrain from investing in markets as they do not possess adequate knowledge of the stock market. Investing in NIFTY 50 ETF doesn’t require extensive research as all the fund does is buy stocks from its underlying index, which is the NIFTY50. You will always have the option of buying stocks on your own but for which you will require a huge investment to invest in stocks of multiple sectors. Thus, investing in NIFTY 50 ETF gives your invested money a broad exposure which a single stock may not able to do so.
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