The trend of passive investing is picking up in India. In fact, ETFs and index funds have started to dominate new scheme launches.
The rising interest and slew of new launches have widened the available variety. So much so that, it's now even possible to build a quality portfolio with index funds and ETFs.
Experts believe that investors should allocate at least 30% of their equity exposure in passive funds.
Why one should have a passive portfolio?
Passive investing in India, as of now, is mostly limited to the large-cap space. This is mainly due the fact that managers of large cap active funds have struggled to beat their benchmarks in the last few years.
But, sticking only to large-cap ETFs and index funds is not the best thing to do. Diversification is crucial in all investing strategies.
Diversifying not just helps minimise risks but also raises the chances of earning higher returns.
Passive funds also provide the best route to take exposure in international stocks.
How to design a passive portfolio
Nifty50 and Sensex funds should form the core of any passive investing strategy. One can even put their entire large cap allocation in these funds and ETFs.
The polarisation in the space leaves hardly any room for a manager to beat the indices in the short term. In such a scenario, it’s more sensible to save the fund management cost by investing in passive funds.
Investors should put at least 60% of their passive corpus in the Nifty50 and Sensex funds.
Experts recommend second highest allocation in passive funds that invest in global markets. Funds that mirror NASDAQ 100 and S&P 500 can be a suitable option. 20% of the investment can go into these funds.
The rest of the fund should ideally be invested in mid-cap funds and gold ETFs. The high volatility of midcaps and the stability of gold are needed to provide the perfect balance to any portfolio.
The said allocation may not be suitable for every investor. This is because a lot depends on the age, goals and risk-taking capacity of the investor. Financial advisors and distributors should take the risk taking capacity of the investor into consideration and adjust the allocation accordingly.
