By Jimmy Patel
Amidst volatile times, a passive fund that allows investing via the Systematic Investment Plan (SIP) route could be a thoughtful choice. The investor can choose between an index fund or an exchange traded fund, which are passively managed. These funds are grouped under ‘other schemes’ as per the capital market regulator’s categorisation and are required to invest at least 95% of their total assets in securities of a particular index that it intends to replicate/ track (say the S&P BSE Sensex, Nifty 50, Next Nifty 50, Mid-cap 100, etc.).
To invest in an ETF, the investor requires a demat and trading account. But if it is an ‘ETF fund of fund’ (a wrapper fund to invest in an ETF) or an index fund is chosen, one can invest — in a lump sum as well as SIPs — directly with the fund house (a demat and trading account isn’t necessary). Whichever passive fund is chosen, the selection remains the key. It would be incorrect to assume passive funds to be safer than actively managed schemes. A passively managed scheme with a proven track record and a low tracking error should ideally be considered whereby the returns are in line with the underlying benchmark index.
Understand the scheme’s mandate
To evaluate the performance of any passive fund against its benchmark, first understand the scheme’s mandate for a meaningful comparison. The investment must be guided by the asset allocation best suited for the investor — considering his/her personal risk appetite, the broader investment objective, the financial goals, and the time in hand to achieve those envisioned financial goals.
For someone young, earning a respectable monthly income, with low debt obligations, and long investment horizon (of three years or more); 80% of the portfolio could be held in equity, 20% in gold (serving to be a portfolio diversifier in times of economic uncertainty) and 12 months of required regular expenses (including EMIs on loans) in a pure liquid fund.
Further, out of the 80% equity allocation, 85% could be in the Nifty 50 ETF FoF and remaining in the other worthy and best-suited equity mutual fund schemes. This shall enable diversification across mutual funds, as well as gain from investment across styles and strategies. At present, the market correction since the peak offers a decent margin of safety and a good opportunity for new investors to invest in an index fund, ETF and/or ETF fund of fund.
Also read: Is it a good time for NRIs to invest in Indian CRE amidst rupee fluctuations?
History reveals that despite all the odds or headwinds and interim market movements, the Indian equity markets have been able to compound hard-earned money for thoughtful investors over the long term. To mitigate the short-term market volatility, starting a SIP may be considered, as it usually facilitates better rupee-cost averaging and potentially compounds wealth.
The writer is MD & CEO, Quantum AMC
