Weighing the benefits and drawbacks of passive funds

In the wake of the post-COVID-19 rally in the Indian equity market, which many hailed as historic, the stark contrast between active and passive investors became evident. While active investors celebrated their gains, a significant portion of passive investors missed the boat, resulting in substantial missed opportunities, as noted by financial expert Kirang Gandhi.

Passive funds, such as index funds and exchange-traded funds (ETFs), religiously track market indices with the aim of maximising gains. Unlike their active counterparts, passive funds refrain from human bias and judgment calls on a company's future prospects, simply buying stocks in line with the underlying index.

One of the key drawbacks of passive investing is the heavy reliance on major indices, which are often dominated by large-cap stocks with expensive valuations. This weighting towards established companies can lead to missed opportunities in the dynamic mid and small-cap sectors, which have the potential to outperform, especially during specific market phases. Kirang Gandhi emphasised this point, suggesting that passive investors may find themselves on the sidelines of surging sectors.