As uncertainty over the performances of actively managed equity schemes lingers, there is merit in allocating a portion of your portfolio to low-cost passive equity products, like index funds and ETFs. These funds mimic the returns of the indices. Usually the number of gaining stocks shrink when markets are at all-time highs.
Financial advisors say funds actively managed by managers tend to struggle in such times.
In the past two years, various fund houses have introduced index funds and ETFs that bet on various indices and asset classes. ET takes a look at four equity index funds recommended by financial advisors.
Tata Index Nifty
Expense Ration: 0.05 per cent (Direct plan)
Assets Under Management: Rs 70 crores
Top 5 holdings: Reliance Industries, HDFC Bank, Infosys, HDFC, TCS
A plain vanilla Nifty index fund, with the lowest expense ratio. Financial planners feel this is one of the best starting point for investors beginning their equity journey. It works well for someone wanting market exposure at relatively cheaper cost and looking to eliminate fund manager bias. Investors with a time horizon of 5 years and above can use the SIP route for exposure to this fund. The fund scores by virtue of having the lowest expense ratio in the Nifty 50 universe of funds.
DSP Nifty Next 50 Fund
Expense Ratio: 0.29 per cent (Direct plan)
Assets Under Management: Rs 69 crore
Top 5 stocks: Adani Green, Avenue Supermarts, Tata Consumer, Dabur India, ICICI Lombard
Many financial planners believe the Nifty Next 50 can help diversify portfolios and help increase returns. They believe this index is less concentrated and has a lower weight to financials. The top 10 stocks of Nifty Next 50 comprise 35.69 per cent of the index as compared to 62.73 per cent in the Nifty 50 portfolio. The Nifty Next 50 is low on financials which account for 17 per cent with higher representation of sectors across healthcare, FMCG, services, chemicals and engineering
Motilal Oswal Midcap Nifty 150
Expense Ratio: 0.38 per cent (Direct plan)
Assets Under Management: Rs 70 crore
Top 5 stocks: Apollo Hospitals, PI Industries, Zee Entertainment, Jubilant Foodworks, Voltas
Given the run up in frontline stocks, financial planners believe investors could take some profits there and reallocate to midcap funds. As the economy revives and growth catches pace, midcaps have the potential to give higher returns than large-cap stocks. Since liquidity is low, there are very few choices and little track record of passive funds in the midcap space.
Financial planners believe investors should allocate 10-15 per cent of their equity portfolios to international funds. The S&P 500 Index accounts for 82 per cent of the US market capitalisation, and is a good proxy for international diversification of portfolios. The set of companies in the portfolio has 40 per cent of revenue coming from overseas. It is a diversified index with the tech sector accounting for one fourth of the index, with financials coming in next at 11.7 per cent.