Mutual Funds

Your Fund Portfolio

Aarati Krishnan | Updated on July 01, 2018 Published on July 01, 2018

Kindly suggest passive index mutual funds. I am not interested in exchange-traded funds (ETFs). All my MF investments are in non-demat form. I invest through weekly Systematic Transfer Plans (STPs) in Franklin India Smaller Companies, L&T Emerging Equities, ABSL Frontline Equity, Mirae Emerging Bluechip, HDFC Balanced and Motilal Focused 35. Kindly review.

Ramanatha Reddy MV

We presume that your main objective is long-term wealth creation. A majority of active funds have managed to outperform their benchmarks by convincing margins in the last five and 10 years. Thus, active funds improve your chances of generating healthy long-term returns from equities. The set of active funds you have chosen for STPs is fine, and you can continue with them.

There are three reasons for considering a passive fund. One, they assure you of matching market returns, while active funds can either outperform or underperform, depending on the stock choices. Two, active funds in India typically charge total expenses of 2-3.2 per cent a year, that eat into returns; while passive funds charge a far lower 0.05-1.5 per cent. Three, the fund-manager churn in India is quite high, and manager changes can impact an active fund’s ability to deliver returns. Passive funds don’t suffer from this disadvantage.

Rather than plain-vanilla Nifty 50 or Sensex 30 index funds (which your existing portfolio of active funds may manage to beat), we suggest that you look at funds that track a broader market index or those that invest in stocks lower down the market-cap scale. Nifty Next 50 (earlier known as Junior Nifty) has proved to be a good index to capture the returns from emerging bluechips in the market. ICICI Pru offers a Nifty Next 50 Index Fund, and UTI’s new Nifty Next 50 Index Fund is a good open-end fund to passively mirror this index.

To gain exposure to bluechips without a market-cap or liquidity bias, equal weight nifty funds are also worth owning. When choosing between two passive funds tracking the same index, go for the one with the lowest expense ratio.

You wish to stick with open-end index funds and not go for ETFs because you don’t own a demat account. However, if you are keen to expand your passive portfolio in future, you must consider opening a demat account and taking the ETF route.

Even today, ETFs offer a far greater variety of passive products playing on different indices, than open-end index funds.

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