Building passive portfolio: Investors must actively consider

It is no hidden secret that passive investing is gaining momentum in India. Buoyed by several incentives such as market-linked returns, minimum tracking error, diversification, and transparency in portfolio composition, investors are looking at passive products with a new sense of vigour. Asset management companies have taken the lead here by meeting increased consumer demand with innovative schemes that track multiple indices and sectors. According to AMFI’s December 2021 report, there were around 225 passive schemes in India and this rally is expected to continue in the coming years.

Consider the case of an investor who wants to opt for downside protection to his portfolio at the same time being able to leverage the benefits of the domestic markets. In this case, passive strategies serve the varying needs of customers with an undivided focus on quality and sustainability.

Let’s break down what makes the passive universe a lucrative proposition for investors.

The bankable ‘Nifty’ index

Based on the sectors they operate in and their full market capitalisation, companies in India are classified on the Nifty Index either under Nifty 100, Nifty 50, or Nifty Next 50, or various sectorial Nifty indices, amongst others. Now, the Nifty 50 index tracks large-cap stocks represented by mostly big blue-chip companies. On the other hand, the Nifty Next 50 Index measures the performance of those companies that showcase the potential to become the next-generation market heavyweights.

All of them promise sector diversification, giving investors a much-needed edge in their respective portfolios. Investing in the ever-evolving Nifty index is ideal for investors who are risk-averse but still want equity exposure in their portfolios. As inflation grows, a diversified index portfolio will help investors generate inflation-adjusted returns by mitigating volatility.

Sectoral ETFs

The pandemic has been a testament to the fact that sectors such as healthcare, banking, consumption, technology will continue to thrive even in the face of adversity. Being necessary for survival, one could also call them as the key pillars of the economy. The passive investing universe is armed with several sectoral ETFs that allow the investor an all-encompassing diversified portfolio cutting across sectors, geographies, and sometimes, even industries! By investing in these funds, one is essentially directly playing into their growth potential.

For instance, take the Nifty Bank Index that is designed to track the performance of the most liquid banks listed on the NSE. Coupled with the power of technology and continued government focus, regulatory push and measures, and enhanced corporate governance within the public and private sector banks, investing in Banking ETFs offers investors the unique opportunity to be a part of India’s financial transformation. The same holds true for other indices such as technology, consumption, healthcare, etc.

International optimism

Consider this – You may be consuming products/services of some of the world’s well-known brands and interacting via global networks. So what is limiting you from investing in their growth stories and amplifying your opportunities? Exposure to global growth stories allows investors capital appreciation benefits from the comfort of their hometown. In India, you can do this via Fund of Funds. The fund manager invests in units of offshore mutual fund schemes by ensuring that the target fund’s investment philosophy and risk profile matches with that of the fund’s mandate to create long term wealth.

Even though we have more than 5,000 companies listed on our exchanges, they account for barely 3 per cent of the world market capitalisation share.

Thankfully, we have access to multiple Fund of Funds that focus on global markets to leverage the power of international companies. Some of them also cater towards Emerging Markets such as China, Taiwan, etc. Global investing comes at the quadruple advantage of international opportunities, reduced risk, portfolio diversification, and better risk-adjusted global returns.

Proliferating debt fund of funds

What most investors may not realise is that passive strategies are not only meant for equity-focused funds. Take for instance the average investor, while he/she may have some working knowledge of the equity world, most of them will draw a blank when it comes to their understanding of debt funds.

When you add in jargons like durations, yield curves, credit policy, inflation, monetary policy and the Fed, it is hardly surprising that the retail investor gets confused. Thankfully, investors need not worry because they can now ensure debt exposure through passive investing strategies as well.

Just like equity, passive debt funds also replicate the underlying debt benchmark. By staying invested in a Debt Fund of Fund, the investor can benefit from short-term tactical calls without worrying about the incidence of tax on short term investments in Debt MFs.

Furthermore, he can dynamically allocate his assets across duration and credit strategies.

Changing times and investor needs demand innovation in every aspect of investing, be it offerings or channels. Today, the market has multiple opportunities for investors across the board. The biggest mistake one can make at this juncture is not investing in the market due to some pre-conceived notions.

India continues to retain its position among the top emerging markets because of our growth consistency. The opportunity to leverage is now. The passive universe offers multiple approaches if they wish to get on the growth bandwagon.

(The writer is the Head of Products & Alternatives at Axis AMC)

Watch the latest DH Videos here: