Speaking at Cafemutual Ideas Fest 2021, Saugata Chatterjee, Co-CBO, Nippon India MF highlighted the importance of passive funds as a core in asset allocation.
On the global front, the passive AUM accounted for around 20% of the total AUM in Sep 2020. Further, the 5x growth of passive AUM over the last decade hints at the growing opportunities and the shift towards passive investments. Saugata believes that India is at its nascent stage where passives contributed 10% of the total AUM as of December 2020. Such a number was 41% in the US markets back in March 2020.
Cafemutual approached some of the well-known names from the financial intermediary community to understand where passives find their fit in a portfolio.
International investments
India’s share of around 4% in the global market capitalization suggests that many exciting opportunities lie elsewhere. Some of the most coveted brands are listed on international stock exchanges. Geographic diversification of the portfolio offers opportunities to enhance returns.
Suresh Sadagopan of Ladder7 Financial Services believes that passive funds offering exposure to global stocks can be a cost effective way to invest in overseas markets. Currently, a few funds follow international indices like the S&P 500, Nasdaq through passive route.
Large cap space
Many believe passive funds make sense in the large cap space. After introduction of TRI, many active funds are finding it challenging to outperform the benchmarks. Further, the market has witnessed a narrow rally where only a handful of stocks influenced the index performance.
In such a scenario, passive funds make more sense in large cap space.
Sectoral exposure
Investors should consider investing in risky sectoral funds through passive funds to reduce costs. While the risk of sectoral investment remains in both actively managed and passive managed funds, investors can reduce the cost of taking this risk through passive funds.
Ideal allocation to passively managed funds
Ideally, investors should invest at least 20% of their equity allocation in passive funds, recommended Chatterjee.
Another option could be following 1:1 allocation. Certified Financial Planner Kalpesh Ashar of Full Circle Financial Planners and Advisors said that if an investor invests in a large cap fund, he should supplement it by investing in a passively managed large cap fund. Such a blend allows the investor to understand and compare the performances distinctly.
