Mutual Funds

Your Fund Portfolio

Dhuraivel Gunasekaran | Updated on February 16, 2020 Published on February 16, 2020

Please suggest the best index funds for the long term — 10-15 years. I am 34 years old and my risk appetite is medium to high. I want to invest ₹10,000 per month through SIPs.

Madhan Kumar, Chandigarh

It is a good idea to set up a mutual fund portfolio comprising index funds.

This helps match your portfolio return with the market return.

Actively managed funds aim to perform better than their benchmarks with the help of the fund manager. The fund manager attempts to generate income by buying and selling stocks backed by deep research.

Investors in actively managed funds will, however, have to pay higher expenses for the services of the fund manager.

On the other hand, index funds are passively managed mutual funds trying to replicate the performance of the underlying benchmark. They imitate the portfolio of an index (say, the Nifty 50) by investing in stocks that are a part of the index in the same proportion as in the index. With no active management, index funds have much lower charges. The other variant, exchange-traded funds (ETFs) are also passively managed MFs traded on BSE and NSE.

Currently, in India, there are 32 index funds (all equity-oriented) tracking the broader indices, including the Sensex, the Nifty 50, the Nifty Next 50, the Nifty 100 and the Nifty 500. A banking sector index fund, the Nifty Midcap 150, a Nifty Smallcap 250 and two Nifty 100 Equal Weighted index funds are also part of offerings. Here, we have not considered ETFs as SIPs are not allowed in ETFs. However, we have included Funds of Funds (FoFs) which invest solely in equity ETFs. These are treated as equity funds for taxation, and enable SIP investing.

While selecting index funds, you have to look at indices that suit your risk profile. Within the funds tracking these indices, the funds with a lower tracking error (TE) and larger corpus are preferable. TE measures how closely an index fund tracks its chosen index, and is an efficient tool that measures the performance of index funds. Index funds with lower TEs are preferred choices.

Given your profile, you can consider investing in index funds tracking the Nifty 50, the Nifty Next 50, the Nifty 500 and the Nifty Midcap 150.

You can also include ICICI Prudential Passive Strategy Fund, which is an FoF that invests in a basket of ETFs, in your portfolio.

Suggested funds

The Nifty 50 includes the top 50 large and actively traded stocks from diverse and leading industries, and reflects the broader economy. You can start a monthly SIP of ₹1,000 in HDFC Index Fund - Nifty 50, which is one of the schemes with a relatively large corpus (₹1,064 crore) and a low TE (0.004 per cent).

The Nifty Next 50 consists of 50 large-cap companies which are part of the Nifty 100 but do not form part of the Nifty 50. Stocks in this index are potential candidates for inclusion in the Nifty 50 in the future.

Over the past 10 years, the Nifty Next 50 has delivered a CAGR return of 12.5 per cent while the Nifty 50 generated 11 per cent. Under this category, you can start a monthly SIP of ₹3,000 in UTI Nifty Next 50 Index Fund.

You may argue that instead of investing in the Nifty 50 and the Nifty Next 50 index funds separately, you can opt for a single Nifty 100 index fund. The truth is that, under the Nifty 100, the weight assigned to Nifty 50 stocks is around 87 per cent while for Nifty Next 50 stocks, it is only 13 per cent (as of December 2019).

The Nifty 500 is a far more diversified index and representative of the whole market. You can start a monthly SIP of ₹2,000 in Motilal Oswal Nifty 500 Fund, the only scheme tracking the Nifty 500.

In the Nifty 500, the weight given to the Nifty 50 and the Nifty 500 is 69 per cent and 11 per cent, respectively.

You can start a monthly SIP of ₹2,000 in ICICI Pru Passive Strategy Fund (FoF) which has invested in seven equity ETFs managed by ICICI Pru AMC including BSE 500, Nifty 50, Bharat 22, Nifty Low Vol 30, Midcap, Private Banks and NV 20 ETFs. It enables access to other sectors and smart beta strategies.

Under the mid-cap spectrum, you can start a monthly SIP of ₹2,000 in Motilal Oswal Nifty Midcap 150 Index Fund.

It is worth noting that unlike active large-cap funds, actively managed mid-cap funds have outperformed their corresponding indices in most time-frames in the past.

You may therefore consider allocating some amount to top-performing funds in the actively managed mid-cap category.

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Published on February 16, 2020
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