Smallcase- Active or Passive Investments
Sunday, Sep 18, 2022
In the world of stock markets, the active vs passive investments debate causes a conundrum each time. It is very important to understand what both these terms actually mean. Active investing takes place when the investor carefully analyzes each piece of news and takes active calls on such news and the market conditions. Passive investing, however, does not involve taking subjective calls. It follows a predefined rulebook to investing.
In order to further elaborate the difference between the two, let’s take an example. In passive investing, the aim of the fund might be to replicate the return of Nifty-50. So whatever amount is invested by an individual investor, it would be allocated across stocks in such a way that an equivalent return is earned. Active investing involves outperforming the set target, say Nifty-50. Here, the fund tries to achieve the highest possible return on a given investment. Be it passive or active investment, what it ultimately boils down to is the cost associated with both- active and passive investing. It is logical to say that active investing involves higher cost due to the analysis that goes behind it.
Sometimes, the costs associated with active investing become too much to bear and it becomes difficult to justify these costs when returns are low. Passive investing has therefore gained importance.
A smallcase is a curated basket of stocks/ETFs that reflects a certain objective (ideas, themes, strategies). Best smallcase investment is generally based on passive investing because there are a set of rules that each smallcase fund manager follows. For example, a certain level of dividend yield on a stock. Here, the fund manager sets an upper and lower limit to the dividend yield from the small case stocks invested in. Careful attention is paid to keep the yield between the set bars. The best smallcase investment follows the set and promised guidelines at all times. Best smallcase for long term would be that which is consistent with the set performance. If the small case stocks return the promised level of return timely and regularly, it can be categorized under the best smallcase for long term.
Best smallcase investment strategy involves investing in low-cost and systemic strategies while also taking into account long term financial well being. In such a case, there are a number of small cases to choose from. All of them are low-cost. They just have a small transaction fee.
Investors should carefully take a call on passive investing and use smallcases to build their wealth over a period of time.
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