Ready for passive investing? Here is how to kick-start your portfolio

Experts say new passive investors should avoid sector or theme-based indices or factor-based strategies

- Jash Kriplani

Passively managed funds offer investors a low-cost way to participate in markets, with expense ratios far lower than those of actively managed funds.

By tracking the same indices that active funds use as benchmarks, they eliminate the risk of underperforming the benchmark—because investors are invested in the benchmark itself.

Today, passive funds track more than 100 indices, spanning market-cap-weighted, sectoral and thematic indices, as well as factor-based strategies. As of 30 September, there were 268 exchange-traded funds (ETFs) and index funds tracking these indices. ETFs accounted for ₹9.5 trillion in assets under management (AUM), while index funds managed ₹3.08 trillion in AUM as of the same date.

Since each index carries its own risk-return profile, here are some dos and don'ts for your passive investing journey.

Keeping it simple

Advisors and experts recommend a simple approach for beginners. “For most investors who are starting out, a large-cap-oriented equity portfolio is the best starting point. If someone is comfortable skipping midand small-caps entirely, a Nifty 50 or a Nifty 100 index fund is more than sufficient,” said M. Pattabiraman, founder of personal finance platform Freefincal.

A beginner can consider combining the Nifty 50 Index with the Nifty Next 50 Index. The latter can give a flavour of mid-caps, even though it is a large-cap fund, said Anil Ghelani, head of passive investments and products, DSP Mutual Fund.

“It is not a true mid-cap index, but the risk-reward is similar to that of mid-caps, as it represents stocks beyond the widely-tracked Nifty 50 stocks,” Pattabiraman added.