Passive investing in India has now become mainstream. The total assets under management (AUM) across 690 existing passive funds are nearly Rs.15 trillion— almost a fifth of the total mutual fund assets in the country. Five years ago, there were only 160-odd passive funds running a little over Rs.3 trillion in AUM. Investors have clearly grasped the proposition behind passive investing—it is very difficult to consistently generate market-beating returns, as the market (index) itself runs efficiently in the long run. Instead of trying to beat the index by picking stocks, passive investing simply involves mirroring the index. Index funds and exchange-traded funds (ETFs) are the two vehicles that let you invest passively.Even as passive investing has gained traction, many myths and misconceptions abound. These are harmful enough to lead you to wrong choices, unrealistic expectations and ultimately, disappointing outcomes. Here are a few such myths about passive investing:Myth 1The cheapest passive fund is the bestLow costs of passive funds are a big draw for many investors. In some index funds, expense ratios charged are as low as 0.05-0.1%, while some ETFs are even cheaper at just 0.02- 0.05% per annum. Investors often take comfort in funds with lower fees, expecting better tracking with the underlying index. However, lower costs in passive funds don’t always correlate with lower tracking error. Tracking error refers to the volatility of the difference between a fund’s return and that of its underlying index. It measures how consistently a fund follows its index. A marginally cheaper fund can still deliver worse outcomes if it tracks the index poorly.ALSO READ | PMS vs mutual funds: 5 reasons to invest, and 5 red flags to watchWithin passive funds, some even prefer ETFs for lower costs. However, this approach overlooks the associated costs of ETFs beyond the visible expense ratio. ETFs are bought and sold on the stock exchanges. ETF trading volumes vary widely, which affects liquidity and, therefore, the ability to buy or sell at the desired price and time. Arun Sundaresan, Head ETF, Nippon Life India Asset Management, explains that when investing in ETFs, investors should look at volumes at the stock exchanges (higher the better), impact cost (lower the better), tracking error (again, lower the better) and expense ratio. “All these are related. A higher impact cost, which may be a result of lower volumes, will have a direct bearing on the total cost of investing, often much higher than the expense ratio of funds,” he says.Passive investing enters mainstream