Why you need to look at index funds, ETFs now

In the past two years various fund houses have introduced index funds and ETFs that bet on various indices and asset classes. ET takes a look at four equity index funds recommended by financial advisors.

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ET Spotlight
As uncertainties over the performance of actively-managed equity schemes lingers, there is merit in allocating a portion of your portfolio to low-cost passive equity products, like index funds and ETFs. These funds mimic the returns of the indices. Usually the number of gaining stocks shrink when markets are at all-time highs. Financial advisors say funds actively managed by managers tend to struggle in such times. In the past two years various fund houses have introduced index funds and ETFs that bet on various indices and asset classes. ET takes a look at four equity index funds recommended by financial advisors.

Tata Index Nifty
Expense ratio: 0.05% (Direct Plan)
Assets under management: Rs 70 crore
Top 5 holdings: Reliance, HDFC Bank, Infosys, HDFC, TCS
A plain vanilla Nifty index fund, with the lowest expense ratio. Financial planners feel this is one of the best starting point for investors beginning their investment journey. It works well for someone wanting market exposure at relatively cheaper cost and looking to eliminate fund manager bias. Investors with a time horizon of five years and above and use the SIP route for exposure to this fund. The fund scores by virtue of having the lowest expense ratio in the Nifty 50 universe of funds.

  • 15.31%Annualized Return for 1 year
  • >3 years Suggested Investment Horizon
  • N.ATime taken to double money
Tata Index Nifty Regular ★★★★
  • 10.6%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 5.6 YearsTime taken to double money
Motilal Oswal Midcap Nifty 150
Expense ratio: 0.38% (Direct Plan)
Assets under management: Rs 70 crore
Top 5 stocks: Apollo Hospitals, PI Industries, Zee Entertainment, Jubilant Foodworks, Voltas
Given the run up in frontline stocks, financial planners believe investors can take some profits there and reallocate to mid cap funds. As the economy revives and growth catches pace, mid cap stocks have the potential to give higher returns than large cap stocks. Since liquidity is low, there are very few choices and little track record of passive funds in the mid cap space.


DSP Nifty Next 50 Fund
Expense ratio: 0.29% (Direct Plan)
Assets under management: Rs 69 crore
Top 5 stocks: Adani Green, Avenue Supermart, Tata Consumer, Dabur India, ICICI Lombard
Many financial planners believe that Nifty Next 50 can help diversify portfolios and increase returns. They believe this index is less concentrated and has a lower weight to financials. The top 10 stocks of Nifty Next 50 comprise 35.69% of the index as compared to 62.73% in the Nifty 50 portfolio. The Nifty Next 50 is low financials which accounts for 17% with higher representation of sectors across healthcare, FMCG, services, chemicals, and engineering.

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Motilal Oswal S&P 500 Index Fund
Expense ratio: 0.49%
Assets under management: Rs 530 crore
Top 5 holdings: Apple Inc, Microsoft, Amazon, Facebook, Alphabet Inc Class A

Financial planners believe investors should allocate at least 10-15% of their equity portfolios to international funds. The S&P index accounts for 82% of the US market capitalisation, and is a very good proxy for international diversification of portfolios. The set of companies in the portfolio has 40% of the revenue coming from overseas. It is a diversified index with tech accounting for one fifth of the index, with financials coming in next at 11.7%.
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