Passive Funds For Profitable Investments

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

One of the key benefits of investing in mutual funds is an opportunity to build a portfolio of actively and passively managed funds. Over the last couple of years, index funds and ETFs have begun to find a place in the portfolios of experienced and new investors. While there is certainly merit in indexing a part of your portfolio, it’s important to understand the different aspects of investing in passively managed funds. Index funds are passively managed funds that track an index. 

When you invest in an index fund, that money is invested in the companies that make up that particular index, which ensures that these investments are free from any bias the fund manager may have for a set of sectors or stocks. Moreover, since a variety of indices are tracked by index funds, you can choose funds with different combinations of sectors and stocks. Of course, when you invest in an index fund, you forfeit your chances of beating the market. Another option for passive investing through mutual funds is ETFs.

As an investor you need to understand how they are different. The major difference is the manner in which you can buy and sell them. While you can buy and sell index funds directly from mutual funds, ETFs are traded on the stock exchange like a stock. Hence, you must have a demat account to buy and sell them. Moreover, while index funds and ETFs have lower expense ratio as compared to actively managed funds, ETFs are comparatively cheaper.

If you are new to investing in mutual funds or don’t want to manage your portfolio actively, index funds can play an important role in your portfolio. Index funds have more transparency as you are aware upfront about which stocks will be a part of the portfolio and in what proportion. Besides, you get to choose from a variety of index funds that not only allow you to invest in different segments of the market but also benefit from different strategies and philosophies like value investing, alpha low volatility and quality stocks. 

Of course, you have to be careful while selecting funds as investing money across a variety of index funds may not always work in your favour. However, while deciding the portfolio mix, you must remember that in a market like ours, fund managers have the opportunities to out-perform the stock market and create alpha for investors. Therefore, a combination of active and passive funds can work better. Let’s now understand what a variety of index funds have to offer to you.

∎ Nifty 50 Index Fund: These funds track Nifty 50 index. The Nifty 50 is a 50 stock, float-adjusted market capitalisationweighted index for India. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds.

∎ BSE Sensex Index Fund: These funds track the Sensex which is the benchmark index of the BSE in India. It comprises of a basket of 30 stocks representing the country’s largest and financially sound companies listed on the BSE.

∎ Nifty Next 50 Index Fund: These funds track the Nifty Next 50 index. The Nifty Next 50 index represents 50 companies from Nifty 100 after excluding the Nifty 50 companies.

∎ Nifty 150 Mid-Cap Index Fund: These funds track Nifty 150 Mid-Cap index which is designed to track the performance of companies with a mid-sized market capitalisation. It consists of 150 companies.

∎ Nifty 50 Equal Weight Index Fund: These funds track the Nifty 50 Equal Weight index that represents an alternative weighting index strategy to its market capitalisationweighted parent index, the Nifty 50. The index includes the same companies as its parent, however, weighted equally.

∎ Nifty NV 20 Index Fund: These funds track Nifty 50 Value 20 index that is designed to reflect the behaviour and performance of a diversified portfolio of value companies forming a part of Nifty 50 index. It consists of the 20 most liquid value blue chip companies listed on the NSE.