Many mutual fund investors today prefer the passive route to building their portfolios. Passive funds hold a basket of stocks or bonds that simply mirror a pre-constructed index. They are predictable in their choices, carry much lower management fees than active funds and do not rely on the skills or continuity of an individual fund manager to deliver returns.

While most Indian investors believe that the index fund menu is pretty limited,  you may be surprised to know that the menu of passive funds offered by Indian fund houses has grown by leaps and bounds lately. Today, there are over 300 passive funds spanning a range of assets and themes, from large-, mid- or small-cap stocks, to sectors and sub-themes, to government securities, State Development Loans (SDLs) and AAA bonds. Here’s how you can mix and match them to meet your key financial goals.

Beginner investor

Are you a young investor who’s just landed her first job and isn’t sure which funds to choose for your SIP (Systematic Investment Plan) investments? Well, if you plan to put away money for the long term (5 years plus), don’t delay your start and begin SIPs in index funds that track bluechips instead. Nifty100 index funds are good choice for SIPs for first-timers. The Nifty100 index features the top 100 stocks in the Indian markets ranked by their free-float market cap and is more diversified than either the Nifty50 index or the Sensex 30. Given that owning a Nifty100 fund automatically helps you hold a basket of 100 large stocks, there’s no need to own multiple funds.

Some of the options available to track it are IDFC Nifty100 Index Fund and HDFC Nifty100 Index Fund, apart from ICICI Prudential’s Nifty100 ETF. ETFs or Exchange Traded Funds are bought from the stock exchange like shares and will need you to have a demat and broking account. The Total Expense Ratios (TERs), or annual fees charged by these funds, are in the range of 0.10-0.50 per cent.

Buying a car or holidaying

Do you want to put away money towards buying a car, upgrading your phone or taking a fancy vacation in the next 3 to 5 years? Equity funds won’t suit your purpose, as stock market volatility can make your returns tough to predict. But passive debt funds investing in safe securities can help you meet these goals. 

Target maturity funds are a useful class of passive debt funds that own a portfolio of safe debt securities such as g-secs , SDLs, PSU bonds and AAA-rated corporate bonds. Apart from reducing credit risk because they stick to safe bonds, such funds help you minimise risks from interest rate movements. They own bonds that mature on a specific date in future, so that you know exactly when you can get back your investment.

Currently, Edelweiss AMC has two Bharat Bond ETFs maturing in April 2023 and April 2025 respectively which invest in AAA-rated PSU bonds. They carry very low TERs of 0.0005 per cent, with current portfolio yields of 6.4 per cent to 7.04 per cent which indicate your possible returns, before fees. If you don’t own a demat account, you can buy the same ETFs through the Fund of Funds route from Edelweiss.

If your goals are 4 to 5 years away, there are a number of target maturity funds from different AMCs - Aditya Birla Sun Life, Kotak and ICICI Pru and IDFC to name a few - that invest in indices that are made up exclusively of SDLs, gilts and AAA bonds in various combinations, maturing in 2026, 2027 and 2028. At present, funds that combine gilts with SDLs seem to offer a better bet. (See this for pointers on how to choose). IDFC CRISIL Gilt 2027 and 2028 Index Fund, Aditya Birla Nifty SDL April 2027 Index Fund and Kotak Nifty SDL 2027 Top 12 Equal Weight and Nippon 5 year G-sec ETF are some good choices. Indicative yields are at about 7 per cent, with TERs of 0.15-0.30 per cent.

Child’s education

Keen to plan for your ward’s higher degree that is 7-10 years away? Then you afford to build a balanced portfolio that is a mix of passive equity and debt funds.

For a goal that is 7 years plus away, you can allocate to equity and debt passives in the ratio of 60:40 or 70:30 depending your risk appetite. For the equity portion, you can either play it very safe and use a Nifty100 index fund or take on a bit of risk (for higher returns) by adding a Nifty Midcap150 Fund. The Nifty100 has managed a 12 per cent CAGR (Compounded annual growth rate) if held for five years based on long-term rolling returns, while the Midcap 150 has delivered about 14 per cent CAGR. The Midcap 150 Fund owns a basket of the next 150 stocks after the top 100, in the listed universe, ranked by market cap. Motilal Oswal Midcap 150 Index Fund is a good option here, with a TER of 0.22 per cent for the direct option and 1 per cent for the regular option.  

For the debt portion, you can again use target maturity funds that invest in a mix of SDLs, gilts and PSU bonds. Open end funds are available from different AMCs with maturities ranging from the year 2025 to 2032. Do match the maturity date of the fund with the timeline for your goal.  

If you have plans to send your child abroad for higher studies, one of the key risks you face (apart from sky-rocketing college fees) is the cost of education overseas shooting through the roof due to the Rupee depreciating against the US dollar. Passive funds offer you options to deal with this risk. Carving out say, 15-20 per cent of the equity portion of the education portfolio towards international equity funds investing in US indices, will peg part of your returns to the US dollar. Motilal Oswal Nasdaq 100 Fund of Funds (and ETF), Kotak Nasdaq 100 Fund of Funds (and ETF) are good option to consider. If you aren’t keen on the high-risk tech sector, you can consider Motilal Oswal S&P 500 Index Fund or Mirae S&P 500 Top 50 ETF, as replacements.

Wedding portfolio

If planning for your child’s wedding that is 7-10 years away, you can again think of a balanced portfolio with a 70:30 or 60:40 equity:debt allocation. While the choice of equity and debt funds can be the same as above, instead of an international fund, you can consider allocating part of this portfolio to gold and silver ETFs. This is assuming gold or silver jewellery or gifts will figure prominently at your child’s wedding. Nippon’s Gold and Silver ETFs can be preferred for their reasonable secondary market liquidity. If you don’t own a demat, you can use fund of funds’ from Nippon AMC to get the same exposure.     

Retirement

Looking to accumulate a sizeable corpus towards retirement? This can be achieved through passive means too. If your retirement is 10 plus years away, you can afford to own a fully equity portfolio. Be sure to add slightly riskier passive funds such as Nifty Next50 Funds or Nifty Midcap 150 funds to your core holding of Nifty50 or Nifty100 funds. This will bump up your returns and lead to a healthier nest-egg.

If your retirement is less than 10 years away, you may want to hedge against equity market volatility by owning some debt in your retirement portfolio. For the debt portion, constant maturity debt funds are a good bet. These funds own just one or two government securities in their portfolio so that their average maturity always remains at a fixed level. Both 5 year and 10-year constant maturity funds are a good bet here. SBI’s 10 year Constant Maturity Fund and DSP’s 10 year G-sec are good options, as is Nippon India’s 5 year G-sec Fund.

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