ET Alpha Wealth Summit 2.0 | SIFs, passive funds and GIFT City: How India's wealth portfolios are evolving, says Tata AMC's Anand Vardarajan

From low-cost index investing to sophisticated long-short strategies and global investment access, Tata Asset Management MD & CEO Anand Vardarajan explains how newer investment products are changing portfolio construction for India's wealthy investors.

India's wealth management landscape is evolving as investors increasingly look beyond traditional equity and debt investments to build diversified portfolios.

Passive funds, Specialised Investment Funds (SIFs) and investment opportunities through GIFT City are emerging as important additions to the portfolio-construction toolkit, according to Anand Vardarajan, MD & CEO of Tata Asset Management.


Speaking at a fireside chat with Kshitij Anand at the ET Alpha Wealth Summit 2.0 in Mumbai, Vardarajan discussed how changing market conditions, the growing adoption of passive strategies and the emergence of new investment vehicles are reshaping the way investors approach wealth creation.

He also highlighted the importance of tracking global bond yields, explaining why rising interest rates could put pressure on equity valuations even as newer investment products create opportunities for investors to diversify their portfolios.

US 10-year Treasury yield: The number investors should watch

Vardarajan identified the US 10-year Treasury yield as a key indicator for understanding the direction of global financial markets.

He pointed to a sharp increase in US Treasury yields, which had risen by around 70 basis points over the preceding month at the time of the discussion. The move, he said, was influencing bond markets across Europe and India.

The significance of rising yields lies in their role as a benchmark for the cost of capital. When returns on relatively safe government bonds increase, equities must offer more attractive prospective returns to compensate investors for taking additional risk.

“When yields start going higher, equities have to run harder,” Vardarajan said.

Higher borrowing costs can weigh on corporate profitability while investors may demand stronger returns from equities. This can put pressure on valuations and force price-to-earnings multiples to adjust.

“Interest rates act as gravity on equity markets,” he said.

Vardarajan also flagged persistent crude oil prices and the return of inflationary pressures as factors that could keep markets volatile in the near term.

Active and passive investing: Why portfolios need both

A central theme of Vardarajan's discussion was that investors should not view active and passive investing as competing approaches.

Instead, he argued that both have distinct roles in portfolio construction.

“It is not active or passive. I think the ‘aur’ is in Hindi, not in English. So, it is active and passives,” he said.

According to Vardarajan, passive funds can form the foundation of a portfolio by providing low-cost exposure to an index. Active funds can then be added to seek alpha, while multi-asset strategies can provide diversification through exposure to different asset classes, including commodities and currencies where appropriate.

Long-short strategies can form another layer for investors seeking differentiated sources of returns while paying attention to downside risks.

He said each layer should serve a specific purpose, with the overall allocation depending on the investor's objectives and risk appetite.

To illustrate the importance of market concentration, Vardarajan pointed to the dominance of the Magnificent Seven technology stocks in the US market. When a small group of companies drives a substantial share of index performance, active managers who do not hold enough of those stocks may underperform their benchmarks.

He contrasted this with India's market environment in 2017, when a handful of heavyweight companies, including HDFC, Reliance, Infosys, ICICI, TCS and Kotak, played an important role in driving index performance.

In such phases, passive investors can benefit from the strong performance of index constituents, while active managers who diversify away from those stocks may lag the benchmark.

The broader lesson, he said, is that investors should consider the role of both active and passive strategies rather than relying exclusively on either approach.

Why passive investing is gaining ground

Vardarajan used the example of a crowded Mumbai local train to explain the appeal of passive investing.

He compared alpha generation to securing the coveted window seat on a crowded train. While the person in that seat may enjoy a better journey, everyone who boards the same train ultimately reaches the destination.

Similarly, active fund managers may outperform the market, but consistently identifying the right stocks is difficult. Passive investing offers an alternative by providing exposure to the broader market without requiring investors to predict which stocks will lead the next rally.

“Sometimes when things are very cheap, it does not matter which stock you buy. If you bought the index, it will take care of it,” he said, referring to periods when broad-based market recoveries lift several stocks and sectors.

Vardarajan also highlighted the pace of growth in passive investing in India. Citing figures during the discussion, he said the mutual fund industry was growing at around 19%, active funds at 17% and passive funds at 27%.

While passive funds have a smaller base than active strategies, their faster growth rate makes them an important segment to watch as investor preferences evolve.

SIFs: A new layer in portfolio construction

Specialised Investment Funds (SIFs) were another key focus of the discussion, with Vardarajan describing the category as an important development in India's investment landscape.

SIFs provide access to certain more sophisticated investment strategies, including long-short approaches, within a framework that combines elements of mutual funds and alternative investment funds.

Vardarajan said the category addresses some of the limitations associated with traditional investment products, particularly for investors looking for additional ways to manage portfolios across different market conditions.

One distinguishing feature is the lower entry threshold compared with AIFs. Vardarajan cited a minimum investment of Rs 10 lakh for SIFs, compared with the generally applicable Rs 1 crore minimum for AIFs.

He also highlighted the potential benefit of a simpler tax framework relative to certain AIF strategies, particularly those involving long-short positions.

Using an analogy, he described conventional mutual funds as vehicles with a forward gear, while SIFs offer a reverse gear by allowing certain strategies to participate in falling markets or seek to protect portfolios during downturns.

However, the availability of such strategies does not guarantee returns or alpha. Their effectiveness ultimately depends on the investment manager's ability to implement them successfully.

Vardarajan said the early growth of the category was encouraging, citing industry assets of around Rs 38,000 crore at the time of the discussion. He expects SIFs to become more prominent as more asset managers launch products and investors become familiar with the strategies available.

GIFT City: Expanding access to investment opportunities

Vardarajan also identified GIFT City as an emerging avenue for investors seeking access to a wider range of investment products.

Historically, access to certain overseas investment opportunities involved higher ticket sizes and distribution largely through banks. The emergence of additional products through GIFT City has the potential to lower some entry barriers and broaden access for retail investors, high-net-worth individuals and family offices.

He said this could make it easier for investors to explore products that were previously less accessible because of investment thresholds or distribution constraints.

Alongside passive funds and SIFs, GIFT City is part of a broader shift towards more sophisticated wealth management solutions.

Vardarajan noted that high-net-worth individuals and family offices are increasingly looking for products that can improve tax efficiency and risk-adjusted returns. He expects these newer investment avenues to become more meaningful components of client portfolios as the ecosystem develops.

The changing playbook for wealth creation

Vardarajan's broader message was that portfolio construction is moving beyond a simple choice between equity and debt or between active and passive investing.

Rising global yields and inflationary pressures are making valuations and the cost of capital increasingly important considerations. At the same time, passive funds, SIFs and GIFT City products are expanding the range of tools available to investors.

For investors, the challenge is to understand what each product is designed to achieve and how it fits into their financial goals, risk appetite and investment horizon.

Rather than relying on a single strategy, Vardarajan advocated a layered approach in which low-cost index exposure, active alpha generation and diversification strategies work together.

As market leadership shifts and new investment products become available, the ability to combine these approaches thoughtfully could become an increasingly important part of building and managing wealth.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)