What does 'passive investing' mean?

Following rules rather than making frequent forecasts

Passive investing usually refers to an approach that aims to track a market index or another predefined set of rules.

Instead of repeatedly selecting securities because a manager believes they will outperform, a passive fund generally holds investments according to the benchmark methodology.

Why it is called passive

The word 'passive' does not mean nothing happens.

Indexes are reviewed, companies enter and leave the benchmark, weights change and funds trade to keep tracking their target.

The approach is passive in the sense that security selection is primarily driven by rules rather than ongoing discretionary forecasts.

Potential advantages

Passive funds often have:

• broad diversification

• transparent rules

• relatively low portfolio turnover

• lower management costs than many actively managed alternatives

These are general characteristics, not guarantees.

Passive does not mean low risk

A passive fund follows its market up and down. If the underlying index falls sharply, the fund can fall with it.

The index design also matters. A concentrated index can still create concentrated investment exposure.

Passive Shariah investing

A passive Shariah-compliant fund tracks an index that first applies an Islamic screening methodology. The Shariah rules therefore influence which companies can enter the benchmark.

This guide is general education, not personal financial advice.