Many investors who want to eliminate the risk of choosing fund house or fund manager like to invest a part of their portfolio in passive funds. But is it this simple? Have you considered what could be the difference between the returns of passive funds that track Sensex and Nifty oriented passive funds?
AMFI data shows that over the last 1-3 years, Sensex oriented passive strategies have given as much as 2-3% higher return than passive funds that track Nifty.
Therefore, is it better to go for the 30-stock index Sensex instead of 50-stock Nifty for passive investments? Not exactly!
Sonam Udasi, who manages both Tata Index Nifty Fund and Tata Index Sensex Fund, pointed out that there is not a material difference between returns of Nifty and Sensex if you take a longer investment horizon of 10-15 years.
In the short to medium term, Udasi explains that it all depends on the cycle in which you are entering the market. For instance, Sensex has given higher returns in the last 1-3 years because of a narrow rally in the market. However, going forward, this may not be the case. Especially at a time when many experts including SEBI Chairman Ajay Tyagi have said that they see a broad-based recovery in Indian markets. And in case of a broad-based recovery, Nifty is likely to outperform Sensex, explains Udasi.
Vishal Jain, Head of ETF at Nippon India MF is of the view that the narrower the index, the higher the risk. And given that investors choose passive funds to eliminate non-systematic risks such as picking the wrong stocks, it is better to bet on a wider index. In fact, if an investor with moderate risk appetite wants to do passive investing in the large cap space, they can take both Nifty 50 and Nifty next 50 to cover the entire large cap space, said Vishal.
So, does this mean adding more stocks into the passive strategy is a prudent idea?
Not really. With a wider index, the tracking error can go up. Further, one needs to take into consideration factors such as liquidity of stocks. This could be crucial in case of ETFs as they are traded on the stock exchanges, explains Sirshendu Basu, Head of Products at IDFC AMC.
To conclude, while the annualised returns in the last 1-3 years have been a tad higher for Sensex oriented funds, it does not have a material impact in the long run. Moreover, data on rolling returns shows that with systematic investments, the difference comes down further.
