Passive vs Active Investing: what retail investors should know in 2025
Table of Contents
Introduction
By reading this post, you will understand exactly how to structure a portfolio that captures the simplicity of passive investing and the upside of active picks (Passive Vs Active Investing).
You will see data and studies showing how many active funds underperform, and how combining passive core plus active satellite outperforms naive all-active or all-passive strategies.
You will get three clear benefits:
- A blueprint for a core plus satellite portfolio combining stability and opportunity
- Criteria to choose when and how much to allocate to active themes
- Practical rules to manage risk, fees, and performance drag
In this post, you will also find insights what others skip (e.g. active share, cost drag, rebalancing psychology). At the end, you will get a clear next-step action you can take immediately.
Why the Debate Persists
Advantages and Drawbacks: Passive vs Active Investing
Cost and Fee Drag
Passive/index funds typically have far lower expense ratios because they track a benchmark rather than employ research teams. Nippon India Mutual Fund In active funds, high fees and turnover reduce net returns.
Diversification, Concentration and Risk
Passive funds by design spread across entire indices; this reduces unsystematic risk. But indices can be concentrated (e.g. just a few mega-caps dominate weights). namsecurities
Active funds can concentrate bets, potentially offering higher upside — but also higher downside.
Potential for Outperformance
Active funds, ideally, should generate alpha (returns above benchmark). But empirical studies often show many active managers fail to beat their benchmarks over long periods. namsecurities.in
Behavioral / Emotional Advantages
Passive investing removes much of the fear/greed decision-making; you don’t worry about when to buy/sell. Active investing demands discipline, timing, and emotional control — which many retail investors struggle with.
Evidence, Trends and Data (Especially India)
- Retail trend: A recent survey showed 68% of Indian retail investors now invest in passive funds. The Economic Times
- Fund launches: In 2025, over 100 new passive funds were launched in India — a sign of rising demand. The Economic Times
- Underperformance studies: Research across Indian mutual funds indicates that many active funds do not significantly outperform passive index funds when risk, fees, and consistency are taken into account. IAEME
- Active share constraint: Many active large-cap funds in India have low active share (i.e. they mirror the index too closely) due to regulatory or structural constraints, making it hard to beat benchmark after costs. FundsIndia
These data points reinforce why many investors are tilting toward passive, and why a hybrid strategy can make sense.
The Core plus Satellite Hybrid Strategy
The “Core”
This is your foundation — typically 60% to 90% (or more) in low-cost broad index funds or ETFs. This captures market upside with minimal cost.The “Satellite”
This is where you allocate to active themes: sector bets, small/mid caps, AI / niche ideas, or individual stock picks. This is higher risk, but with alpha potential.Suggested Allocation Moves
- Core: 70–85%
- Satellite: 15–30%
Adjust depending on risk appetite, time horizon, and market view.
Rebalancing and Trimming
Over time, as satellites outperform or underperform, rebalance periodically (quarterly/annually). Trim satellites when they become too large or lose conviction.How to Choose Good Active Satellites
Active Share and Differentiation
Look for funds whose portfolios differ significantly from their benchmark (higher active share). If an “active” fund merely mirrors the index, there’s little point.
Manager Track Record and Conviction
Fund managers who consistently deliver in both up and down markets are rare and valuable.
Cost vs Alpha Expectation
Your satellite must beat the benchmark plus absorb the higher cost. If expected alpha is low, the drag may erase benefits.
Liquidity, Fund Size and Thematic Clarity
Small funds or niche themes can be inefficiently researched, allowing skill to shine. But avoid funds where liquidity is too thin.
Risk Control
Set drawdown limits and stop-loss rules for the satellite portion to protect against blowups.
Pitfalls and What Many Content Miss
- Expense drag and implicit cost: Not just visible fees — taxes, transaction costs, slippage all eat away returns.
- Active share dilution: Many “active” funds drift too close to index holdings, meaning they can’t deliver true upside. FundsIndia
- Overtrading and tax drag: Frequent trading in satellite funds can cause higher taxation and transaction costs.
- Performance cycles: Active tends to outperform in inefficient markets (small caps, emerging sectors) — but underperform in efficient large-cap spaces.
- Behavioral traps: Chasing recently successful funds or giving up on active when it underperforms temporarily.
Now you can get a more realistic, nuanced view.
Implementation Checklist and Examples
- Choose your core index/ETF / low-cost fund
- Pick 1–3 active satellite themes (niche sectors, thematic funds, small/mid caps)
- Set allocation rules (e.g. 70/30, 80/20)
- Decide rebalancing intervals — e.g. every 6 or 12 months
- Set trimming rules: if a satellite exceeds x% of portfolio or underperforms by y%
- Use tools/alerts: dashboards, spreadsheets, fund tracking
- Hypothetical example:
- Core: Nifty 50 ETF (70%)
- Satellite A: AI thematic fund (15%)
- Satellite B: Small cap active fund (15%)
- Rebalance annually
Conclusion- Kosh App and The Stressless Trading Method (STM)
The Passive vs Active investing debate doesn’t have to end in choosing one side or the other. The smarter path is blending them: let passive/index investing form your stable, low-cost core, and reserve a controlled portion for active stock picks or thematic bets as your satellite.
That said, managing a hybrid portfolio — deciding when to tilt more toward your active picks, when to trim, when to rebalance — can get complex and emotionally taxing. That’s exactly where the Stressless Trading Method (STM) by Dozen Diamonds steps in. STM provides a disciplined, mathematical framework to manage these hybrid allocations without guesswork or stress.
Through the Kosh App, you can automate your core plus satellite strategy under the STM umbrella. The app can automate the entire trading process, and ensure you stay within your defined rules — all while you avoid second-guessing or overreacting to noise.
Next Step: Visit www.dozendiamonds.com to discover how Kosh and STM can bring clarity and structure to your investing.
