Money

A mixed bag of active and passive investments to beat the volatility

Amfi (The Association of Mutual Funds in India) data for March 2020 show an income of Rs 2,076 crore in index funds, which is marginally higher than the inflow in large-cap funds. This indicates an interest in passive index strategies in this index that index funds are also launching NFOs in this market.

For example, the currently opened Motilal Oswal S&P 500 Index Fund or L&T Mutual Fund Nifty 50 and Nifty Next 50 NFO, which closed on 31 March. Prateek Oswal, head of Passive Funds, Moti Oswal Asset Management Company, says, “Passive investment is. More in alignment with simplicity. Today, index funds have become a lot more efficient in terms of how they are tracking their benchmarks.” “Should you be passive too? Or should you stick to active funds, especially in current markets?



Why indexing: Simply put, you buy a representative benchmark, such as an index like the S&P BSE SENSEX, the Nifty 50 or the S&P BSE Low Volatility Index. Koel Ghosh, head of South Asia at Standard & Poor’s, says, “Indexes are created by independent index providers through transparent rules. There is no individual bias or fund manager bias in indexing unlike active investment.” Comes with the benefit of low-cost diversification; Here, the single risk concentration is gone. The index is a formula poured into stone; If the market goes down, the index goes down, if it recovers, then the index will recover, there are no surprises. “

In a passive investment strategy, you maximize returns by reducing purchases and sales. There are two common ways to invest in equity markets, choose either an index fund or an index ETF. The point to keep in mind here is that passive investment is intended to mirror the index and not to beat the index.

How to invest: “Index funds have lower expense ratios, do not bear the risk of any style or fund manager and require less monitoring than active funds,” says Gaurav Rastogi, CEO of Kuwara.in. The asset allocation of index funds is attempted to be replicated as an index, but at times index funds have given slightly different returns than the index due to tracking error. The tracking error is the standard deviation of the difference between an investment’s return and its benchmark. Oswal adds, “We have seen that in the long term, investors who invest money usually do two things – make disciplined regular investments and keep costs down. Over the years, index fund spending ratios went down dramatically Is. Make passive funds. Understandable because they do not weaken the index, and there is no reason to actually churn them. “Unit of index funds You can invest lump sum or go for systematic investment plans (SIPs) for the grain. “In index funds, you get NAV at the end of the day,” says Ghosh. From a cost standpoint, there is no transaction fee nor any commission. Says Rastogi, “The study shows that the fund expense ratio is in contrast to the performance of future funds, which works in favor of index funds.”

ETFs: Units of ETFs replicate indices like SENSEX or NIFTY. Each unit has the same weight of shares as the benchmark. “ETFs cost less than index funds, but you need a demat account for ETFs,” says Ghosh. The ETF is listed on the stock exchange; It trades like a stock, so it provides better liquidity. Although the returns of an ETF are usually close to the index, the returns from different ETFs are different.

Says Rastogi, “While both are good options, we would recommend index mutual funds. This is simply because in volatile times, an index ETF can trade on significant indexes or the underlying index, defeating the purpose of index-linked investment. May be exempt. There were days in March when such ETFs were trading 6-7 percent away from the underlying index, which Think that is a big problem. “

Remember, the factor affecting the price of ETFs is demand and supply for the security of the market. Oswal adds, “Investing in ETFs is more suitable for a client who is taking intraday calls. For a long-term investor, index funds make a lot of sense. They are very simple.”

Active Strategy: Active funds try to beat their benchmark through careful stock selection, but charge a fee for this effort. “Considering the inefficiency of Indian markets in relation to those living abroad, there are a lot of opportunities, which can be given more capital by active management,” says Nimish Shah, investment head of BNP Paribas Wealth Management.

You can enlist the help of money managers or financial planners to help you pick the right fund. “We are looking for an alpha that can shortlist based on performance, risk and expertise characteristics of the fund manager,” says Shah.

Active wealth management aims to beat the average returns of the stock market and take full advantage of short-term price fluctuations. “Another thing is to look at risk-adjusted returns. Most good quality managed funds have a standard deviation less than an index,” says Shah. Many experts believe that active fund management is better for performing well in volatile markets.

mixed bag: The experts we spoke to said that it always matters to have a mixed bag of active and passive funds. Says Oswal, “Having 20–40 per cent in passive funds makes sense, because this is a core portfolio that an investor won’t touch for 5, 10, 15 years. Then you can go with a bunch of active portfolios, satellite portfolios. Can add to.. “

There is no debate between active or passive. The point is to take advantage of both strategies. Amit Jain, CEO and co-founder, Ashika Wealth Advisors, says, “The crisis of 2008 was a financial crisis. It is a sovereign crisis for the developing world. It will have a far deeper impact on India. It is a health Began., Gone into a financial crisis and can turn into a geopolitical crisis. There is no single strategy you can rely on, so there is a combination of both. Continuous interval for And using the right product categories and should be asset classes. The next seven months. “Jain has advised its ultra HNI clients invested a seven-month equity savings funds, arbitrage funds and multi-cap funds.



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