Passive mutual funds have become increasingly popular in recent years, as investors look to benefit from the advantages of low-cost, passive investing. Passive funds are funds that track a benchmark or index, such as the S&P 500, and use a relatively simple invested strategy, as opposed to actively choosing stocks or other investments.
First, passive funds offer an easier, lower-cost way to invest. Since they simply track a preset benchmark, they reduce the need for active decision making. This greatly reduces the costs associated with managing a portfolio. It also requires much less work, so investors can devote their time and resources elsewhere.
Second, passive funds minimize risk. Stock markets are driven by events that no one can predict, and actively managing a portfolio involves taking greater risks. With passive funds, however, investors benefit from the greater diversification and lower volatility of the broad market and substantially reduce their downside risk.
Third, passive funds offer comparative returns, with higher returns than many other investment types. Over the long-term, passive funds have been shown to outperform actively managed portfolios. Furthermore, because passive funds are more diversified than actively managed portfolios, the potential for losses is significantly reduced.
Finally, passive funds offer tax efficiency. These funds are limited in their trading, meaning fewer taxable events. This can help to reduce overall investment costs, as taxes eat into returns, and ensures that investors can keep more of their hard-earned money.
In conclusion, passive funds are a great way for investors to benefit from a low-cost, low-maintenance approach to building wealth. With their reduced volatility, higher returns, and tax efficiency, passive funds are an increasingly popular investment strategy.