Ideally, investors should invest at least 20% of their investible corpus in passive funds, believes Saugata Chatterjee, Co-CBO, Nippon India MF.
Within passive funds, investors can further diversify their investment across equity, debt and international funds.
There are different types of passive funds and ETFs available for investment in India. Let's look at how your clients can create diversified portfolios for their investors through passive funds:
I. Equity
Nifty50 ETF, Sensex ETF and Nifty IT ETF are some of the examples. These funds can be further divided into two categories:
1. Market-cap based
ETFs that mirror top indices like Nifty50, Nifty Next 50 and Sensex are known as market capitalisation based ETFs. This is because they add or remove a particular stock based on their market-cap criteria. Such a revision generally happens every quarter.
A good part of the money set aside for passive funds can go into these funds/ETFs. Invesetors can even choose to replace their investments in large-cap funds with Nifty50 and Sensex ETFs.
As index funds mirror these indices, there are higher chances of receiving better returns especially during narrow based rally.
2. Sector based
Sector-based ETFs and funds are designed to track a particular sectoral index such as Bank Nifty or Nifty IT.
These passive funds carry higher risks and are suitable for investors with high-risk appetite.
II. Debt
The debt landspace in passive investing offers limited options such as corporate bond, PSU bonds and gilt.
Bond ETFs are one of the most popular choices in this category. They mirror indices tracking debt instruments like government or corporate bonds. Investors can choose to put a part of their debt allocation in these ETFs as they are cost effective.
III. Global ETFs
A few fund houses offer exposure to international companies through ETFs. These ETFs are a good option to diversify investment portfolio across geographies. Currently, most international ETFs invest in US markets.
