Passive diversification

For the uninitiated, ETFs provide a good way to branch into passive investing

By: Sayantani Kar

Many of us imagine mastering the ups and downs of an unpredictable stock market as the ultimate in equities (investing). It is at once intimidating and mystical. Often, we just make do with a few hyped-up individual stocks or go with mutual funds steered by fund managers.

But experts now are pointing out active modes of investing in equities, as mentioned above, are less than ideal for retail investors like you and me. 

Passive investing is more suitable for the average investor wanting to add to her wealth. Even if we are not yet familiar with passive investing, we can test the waters with exchange traded funds (ETFs). They are at once diversified and easy to track (since linked to an index).

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ETFs are one of the primary tools for passive investing. It is also one of the most user-friendly ones. These are low cost funds which follow the index of an equity or a commodity market. 

We can start with one ETF to diversify into passive investing rather than sticking with only active management of funds. Flagship Nifty ETFs afford a wide swathe of the equities market, for example.

Dipping our feet in passive investing with an ETF is easy because we can start with just a unit of the ETF fund and there are no entry or exit charges.

It is best to go with an equity ETF to start our passive management diversification because they are often more liquid and with low discrepancy between their NAV and purchase price.

Diversifying with an ETF creates an opportunity to illustrate the benefits of passive investing to the uninitiated. Once we are confident with our first ETF, there is a host of ETFs including those that track the physical price of gold and bond ETFs. 

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