Why Passive Fund for long term goals

If you want to go to Pune from Dadar (Mumbai), which is approximately 150 kilometre away, what options do you have?

First option is you may walk from Mumbai to Pune. If you consider walking speed of 5 kilometres an hour,  it will take around 30 hours, without any stop, to reach. Suppose you are able to walk around 8 hours a day, it will take around 4 days. You will need to incur accommodation cost and food cost for these 4 days.

You may go by bus. This will take approximately 5 hours.  The cost will be bus ticket. You may come across traffic from Dadar upto expressway. May be traffic on express way also sometimes.

Next alternative is going by own vehicle. Time will be same as it takes for bus. And you will have to face traffic as well. The cost will be fuel consumption.

Another option is to go by train. Time taken will be around 4 hours. You need to pay for railway ticket as cost.

Final options is by flight. This will take around 3 hours. I.e. may be an hour from Dadar to airport, then an hour at airport and finally an hour in flight to reach Pune. Cost is air ticket.

Now let us evaluate each options.

Walking may not be advisable if you want to reach in time. Flight may not be advisable as will be too costly to reach Pune in same time as it takes by road or train. That leaves us two options I.e. either by rail or by road.

By road you have two options. One may eliminate going by car due to cost. So now final two options are by bus or by train.

Most of you will agree that train is more reliable for traveling and is cost effective as well. So we chose train as our option to reach Pune.

Now, let us try to compare it with financial goals for long term e.g. retirement.

Fix Deposits are like walking. No doubt you will reach the destination with less volatility but it will take more efforts and time to reach your goal. And on the way you have to spend for accommodation and food I.e. inflation.

Other option which will help you reach your destination relatively faster is Equity. In equities we have different options.

Taking flight is like opting for portfolio management services (PMS). It takes same time as equity but is most costly. You may need to pay comparatively higher fees even if the portfolio is in loss. Also profits has to be shared with the managers.

Taking your own vehicle is like directly investing in to equities. Directly investing in equities require lot of efforts in researching the stocks, but yes whatever gained or loss is your own decision, so you have more control over your investment. At the same time, you also have to manage your emotions.

Taking bus is like opting for actively managed mutual funds. You need to evaluate which bus i.e. which fund manager or scheme to choose. You may need to face breakdowns like fund manager stop managing the fund in which you have invested. You may need to continuously monitor the traffic i.e. how other comparable funds are doing as compared to the fund in which you have invested etc.

Trains are like passive funds i.e. Index Funds & ETFs. They are less volatile as compared to other equity options. Yes, sometimes there will be breakdowns in train also, i.e. sometime equity as an asset class under-perform other asset class like fixed income, but over a long period of time, equity as a asset class should yield inflation adjusted better results. As you are opting for passive investment strategy, you need not to worry about traffic i.e. change in fund manager etc. Further passive funds are less costly as compared to actively managed funds. Less cost will help investor gain better results for their investment.

Choose your vehicle to achieve your goal wisely. It’s your money, your goals.

Happy Indexing!

Note: Analogies used here are just for examples & to put across the point in simple way.