Listen to this article
Smart beta passive funds like low volatility, momentum and value funds are somewhat like active thematic funds and should be recommended only when the MFD or RIA has a clear idea of the future market expectations, say MFDs and RIAs.
Most of the MFDs and RIAs Cafemutual spoke to said they prefer recommending only plain vanilla funds in the passive space like Sensex and Nifty 50 index funds and ETFs.
Passive funds, which were introduced as simple low cost investment options for investors, now offer a lot of products which are neither simple by nature nor inexpensive. In the largecap space alone, there are several smart beta funds and ETFs like Nifty 200 Quality 30, Nifty Low Volatility and Value 20.
"Passive funds are used to create low cost portfolios which can give index-lined return. Smart beta funds veer away from this very purpose by bringing in active bias. Expense ratio is also on the higher side," said Tarun Birani of TBNG Capital Advisors.
"In the passive space, it’s better to opt for ‘true’ passive funds instead of going for fancy sounding ones, which might be the flavour right now, but can go out of season anytime," said Rishabh R Adukia, Chief Advisor at Ninecube.
Suresh Sadagopalan of Ladder7 Wealth Planners said that there are enough pure passive funds to meet most investor requirements. "On any day, I would prefer typical index funds which capture different market segments. If I want to invest in top bluechip companies, I will go for Nifty50 or Nifty100. If I want to capture the full market, I will look at Nifty500. Similarly, plain vanilla options exist in the midcap and large & midcap space," he said.
However, some analysts and MFDs find smart beta funds useful in certain scenarios.
Rahul Jain, Senior VP Research at International Money Matters, said, "Mutual funds offer numerous options and all are relevant in different scenarios. If someone wants to outperform the market then momentum fund makes sense and if someone expects the rally to be broad-based then equal weight can be considered," he said.
"These are very specific rules based fund. They might do well in certain cycles. Momentum might do well in the bull run. Low volatility can do well in providing low volatility and certain downside protection during volatile periods. At the end, it depends on what the investors want," said MFD Rushabh Desai of Rupee With Rushabh Investment Services.
However, Rushabh said that he prefers simple products like Nifty50, Sensex, Nifty 500, Nifty Midcap 150 and Smallcap 250 etc. in the passive space but is open to exploring smart beta funds if any of the client is inclined towards it and his profile is apt for such exposure.
If a client wants to outperform the market, shouldn’t they go for active funds?
Not really, said Rahul Jain, adding that smart beta funds are better than active ones in certain scenarios. "In case of passive funds, there is consistency in management. Active funds can sometimes change in character," he said.
