Thanks to a plethora of ETF and index fund launches, it is now possible to build a diversified passive portfolio in India. Within a span of one year, the number of non-gold ETFs has gone up to 100 from 79 and index funds have reached the 50 mark from 35. These launches have ensured that passive investing options are not limited to large-cap funds and Bharat bond ETF. Now, there are ETFs and index funds even in the mid-cap, small-cap and overseas categories.
However, making a portfolio is not enough. Investors and their advisors/MFDs need to have a plan in place to review the portfolio from time to time just like in the case of active funds.
Ideally, the frequency of review can be yearly for equity ETFs or half-early for debt ETFs, believe experts. Investors can also choose to analyse and make changes to the portfolio whenever their goals, financial situation, risk-taking capacity and the overall market and economic scenario changes, they added.
In the review, the first and foremost thing to look at is the tracking error. If the return from any of the passive fund in the portfolio is failing to replicate the index by a wide margin, there is no point in keeping your client invested in it. If you come across such a scenario while reviewing, shift the investment to a fund, which has a lower tracking error.
"The main task of a passive fund is to mimic the index. So the tracking error should be minimum. Of course, some deviation will happen due to expense ratio and rebalancing but it shouldn't go too far," said Mumbai-based MFD Rushabh Desai.
While reviewing, one should also see if the portfolio reflects the planned asset allocation. Say, if the share of equities has gone beyond the initially planned level of 60% due to a rally in equity markets, then the investor should sell some units in equity funds and invest it in debt to bring back the allocations to the desired levels.
Portfolio review also provides an opportunity to tweak the portfolio and bring it in line with changed goals, financial situation and risk-taking capability. Suppose, there's an increase in the number of earning members in your client’s family. In such a case, his risk taking capability will go up and you can advise him to increase equity allocation.
