Selecting a Better ETF
Ninad RamdasiCategories: DSIJ_Magazine_Web, DSIJMagazine_App, Editorial, MF - Editorial, Mutual Fund
Passive investing has experienced significant growth in India over the past few years with investors placing faith on instruments such as index funds and exchange-traded funds (ETFs).
Passive investing has experienced significant growth in India over the past few years with investors placing faith on instruments such as index funds and exchange-traded funds (ETFs). These investment options have steadily increased their share in the total assets under management (AUM) of the industry, now accounting for approximately 9 per cent of the mutual fund industry. Even on absolute terms their AUM has seen an increase of 20 per cent in the last one year. The question is whether you should blindly follow this trend and invest in ETFs or index fund.
It is important to note that passive investing does not involve active stock selection or market timing. The returns of index funds and ETFs are directly linked to the performance of the underlying index, meaning investors cannot outperform the market through these investments. Additionally, while index funds and ETFs offer diversification to some extent, they may not provide exposure to specific sectors or companies that you may be looking for. This is because the initial development of the major equity indices predates their transformation into investment products.
BSE Sensex was created as an innovative tool for measuring stock market activity. Nifty 50 that followed more than 100 years later also was introduced to provide a more comprehensive assessment of the stock market by encompassing the 50 largest stocks traded on the Indian stock exchange. The broader market indices based on Small-Cap and Mid-Cap indices are relatively newer additions and they also represent a particular segment of the market. Therefore, you should dedicate time to understanding the underlying index methodology before investing in any passive product.
The index methodology sheds light not only on how the portfolio is constructed but also on the process of reconstitution. This understanding allows investors to determine if a particular passive product aligns with their investment objectives. While passive investing offers advantages such as broad market exposure and lower expense ratios, understanding the underlying index methodology and conducting thorough research is essential for making informed investment choices. This issue of DSIJ highlights the various advantages and pitfalls of the passive investment process so that you can choose the right path.
Shashikant Singh
Executive Editor