Passive investment, also known as passive management, refers to a business investment strategy that aims to maximize profits in the long-term by minimizing both buying and selling activities in an organization. The approach’s primary focus is on the market-weighted portfolio, which is attained through different means such as imitating an external index’s performance by purchasing an index fund (Appel et al. 111). Notably, passive investment is popular in equity markets, which are characterized by the index funds tracking stock.
Companies prefer passive investment since it helps them to accumulate wealth in the long-term while reducing transaction cost at the current time. Firstly, the strategy minimizes investment costs significantly as compared to active investment by avoiding the high fees associated with frequent trading. Consequently, it enables companies them to generate high returns in the long-term. Secondly, it fosters organization diversification into index funds by tracking an appropriate index (Appel et al. 112). In particular, it enables an investor to determine the appropriate time to buy and sell property after selecting an index in their preferred asset class.
Furthermore, passive investment helps organizations to discriminate and own a percentage of the best-performing companies in the market while selling the ones that fall under the target minimum performance. Moreover, the involvement in minimum buying and selling activities in the passive investment system reduces the amount of taxes a company is obliged to pay. Consequently, this contributes to the achievement of the overall goal to maximize profits in the long-term. Lastly, the strategy helps investors to foster discipline in their business through the distance created between them and organizational buying and selling decisions.
In brief, companies use the passive investment strategy because of its management efficiency and high long-term profit generation.