An investment method known as passive management follows a market-weighted index or portfolio. Although index funds that track stock market indices are where passive management is most prevalent, other investment types such as bonds, commodities, and hedge funds are also starting to use it more frequently.
The basic tenet of passive management is that since it is extremely unlikely that humans will continually outperform the market, they should instead passively “go along with it.” The efficient-market hypothesis (EMH), which contends that present market prices accurately reflect all available information and that people cannot, over the long run, outperform the market, is consistent with this theory.
Passive investment, in contrast to active portfolio management, doesn’t rely on arbitrary human judgement because there are no attempts to profit from market inefficiencies. As a result, passive management is not dependent on a certain collection of assets. The fund management instead seeks to follow a market index.
The primary benefits of passive portfolio management are to its cheaper fees, lower operating expenses, and fewer risks.
