All about ETF investing: Which funds, sectors, m-cap size to pick, how to build passive portfolio? | INTERVIEW

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Updated: June 23, 2021 9:04 AM

India’s capital markets have seen a massive influx of new investors, along with the stellar share market rally after the coronavirus pandemic last year.

Indian stock market, Sensex, NiftyNippon Life India Asset Management, one of the veterans in passive investing, has 22 ETFs with assets under management worth Rs 40,000 crore

India’s capital markets have seen a massive influx of new investors, along with the stellar share market rally after the coronavirus pandemic last year. With it, the popularity of passive investing, through index funds and ETFs, has gained momentum. Nippon Life India Asset Management, one of the veterans in passive investing, has 22 ETFs with assets under management worth Rs 40,000 crore. Vishal Jain, Head-ETF, Nippon Life India Asset Management, tells Shaleen Agrawal of FE Online how retail investors must build a hassle-free passive investment portfolio.

How should investors choose passive funds for their investment portfolios?

One should have a mix of all funds, depending on one’s objectives. For example: One way of creating a portfolio could be to load 50 percent or more on Midcap 150. This increases the volatility of the portfolio, and such an investor has positioned the portfolio towards risk. Another way, for a conservative investor not willing to take much risk, could be to flip it and have 60 percent or more in large cap. That changes the complete profile of your portfolio. It is the individual’s choice. We recommend that one should split the portfolio into Core and Satellite — the Core part being your investment objectives in life.

Which passive funds would you recommend for investors?

For someone willing to ride on the India growth story, one should pick up both Nifty 50 and Nifty Next 50. Both of these sets together constitute the large cap companies in India, and also the Nifty 100. But 85 percent of Nifty 100 is actually Nifty 50, and the remaining 15 percent is Next 50. If one is OK with that split, then it’s fine. But if I want to load myself towards the Nifty Next 50, then I might want to buy both Nifty Bees and Junior Bees in equal proportion.
The Nifty Next 50, over the last 10-15 years, has outperformed the Nifty 50 by nearly 3-4 percent. And why does that happen — because these are large cap companies, but the Next 50 acts like an incubator to the Nifty 50. So, a lot of growth in the large cap companies in India happens in Nifty Next 50. Nippon India Nifty Bees fund has given a return (CAGR) of 15.87 percent since inception in late 2001; while Junior Bees has returned 19.69 percent since 2003. Junior Bees sits in between midcaps and top large caps.

How should new investors invest in smallcap vs midcap vs large cap equities or funds?

Youngsters have got a long period ahead of them to be able to invest and grow money. A large part of their money, ie, 80-90 percent should be tilted towards equity. They should then be investing in the best companies of India. Their investments should be across large caps and midcaps. At this point of time, I don’t know how much sense it makes to go into the smallcap segment; the smallcap segment is still developing, and at this point of time it doesn’t add much to the portfolio. In terms of historical returns, large caps have trumped most smallcaps and midcaps. If a midcap, or even a smallcap, is going to give you a 2-3 percent kicker, but the amount of risk you are taking is very high then. I think you should wait a little while to add smallcap investments to the portfolios at this point of time. It makes sense when you have built your portfolio with a good bunch of companies. Once you have built a decent enough portfolio of large caps and midcaps, then you can start experimenting with other stuff. As Warren Buffett always says ‘start investing early’, therefore it’s important for youngsters to start investing early in their lives.

So, for smallcap investing, are investors better off with active funds?

Possibly, yes. When we look at the data, at this point of time active smallcap funds are doing better. But again, you need to see how much it adds to your portfolio, and is it worth taking that risk. To me, another big factor is cost. If an investment is going to eat up one to one-and-a-half percentage points annually over 25-30 years, then is it really worth it?

Is Nippon India planning to launch new sector funds? Which sectors, and Why?

We are picking up the top three or four largest sector funds from NSE Nifty 50, and launching sector funds on them. The first largest sector in Nifty is Banking. We already have a Bank ETF which is a decade old, and an IT ETF, launched in July 2020. Now, we are launching a Pharma ETF, as we believe growth is going to come from these sectors. Our Consumption ETF was launched in 2014 and its CAGR is 12.8 percent. We believe the IT and Pharma sectors are likely to do very well in the near term.

Do you have any plans to launch international funds?

We will launch two international products — Nasdaq index fund and S&P 350 Europe — in the next three-four months. Through the Nasdaq index fund, we will be able to give exposure to the investors in the US markets. Through the S&P 350 Europe fund, we will be able to give exposure to 16 European countries. Our Hang Seng ETF will give exposure to China. We already have a Japan fund, an active fund, which gives exposure to investors in Japan. So in the next six months investors would be able to access quite a bit of developed markets all across the world.

For investors, what’s the difference between active investing and passive investing?

In active fund management, fund managers tend to believe that they can beat the market using their knowledge and skills, and by taking actions such as trading, technical or fundamental analysis, etc. In passive investing, it is believed that the market is in an efficient place, and all the information is collectively priced into valuations. There are millions of people who trade stocks day in and day out, and collectively decide the actual price at which those stocks trade. Passive fund manager believes that it is impossible to keep out beating the market consistently because he is just one other person, with just his piece of information.

What are the merits of passive investing over active investing?

In active fund management, alpha changes hands. For example, for a few years, some fund would do well, and then for next few years, another one will perform well. For me, passive investing is a simple strategy; it takes a lot of burden off my head. Today, if I want to sit on the India growth story, the simplest thing for me to do is to pick up a Nifty ETF or index fund. It’s got 50 best companies of India, and the expense ratio is just 0.05 percent.
One can be an aggressive investor, and decide to punt on an active fund with the expectation of beating the market. Such an investor’s portfolio should be positioned towards growth and volatility. On the other hand, a conservative investor, who believes that nobody has the ability to beat the market consistently, may build a portfolio of passive funds. However, everyone’s investment styles are personal. Each individual investor must decide how much active and passive investments s/he must have in the portfolio.

*First published on June 22, 2021

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