Passive Investing and Asset Allocation

I’m not sure what has flipped the switch but it appears everyone in India is talking about the rise of passive investing via index funds. All I can say is…finally!!

I first wrote about ETFs almost a decade ago (yeah, I know!), when I talked about Motilal Oswal launching their first actively managed ETF product. In that blog post I talk about how most people should first start with an index funds that tracks the Sensex or Nifty and then look at actively managed ETFs.

Since that blog post, my love for passive index funds has only gotten stronger. However, I would now tell people to stay away from actively managed ETFs or mutual funds. The vast amounts of data shows that most fund managers can’t beat their benchmark index. So why pay a fund manager to underperform when you can get a passive index fund that has a lower expense ratio.

The problem that passive index funds and ETFs have is that no financial planner will recommend them, since there is no money to be made for the advisor. The largest ETF is the SBI – ETF Nifty 50 which has over Rs. 66,000 Cr. in assets under management (AUM) and the expense ratio is 0.07% (7 bps). As an example, if your financial advisor put Rs. 10,00,000 (Ten lakhs) in the SBI fund the expenses would be Rs. 700 a year. Imagine how much of that they would get….basically next to nothing. Hence most advisors will stay away or avoid the discussion around index funds.

Now that everyone is on the passive index fund bandwagon, the next question is how much should you put into these funds. I was never a believer in asset allocation but I think it’s the only way to manage your money in the long term because you never know what’s going to give you the best returns. It’s better to spread your money across various asset classes.

The above is just an example of how you should look at dividing your money into various buckets. Gold is an example of what many Indians have in the physical form via jewelry and who knew that it would be near historic highs as of right now. That’s an example of diversifying your portfolio because you never know what will be the “in” thing. 10 years ago residential real-estate was all the rage, today it’s a very different story.

So which index funds or ETFs would I buy today if I had to? Since I’m a Marwari at heart, the expense ratios are one of the first things I look at. I know that’s not the only thing but what can I say!

The list:
Nifty – Motilal Oswal Nifty 50 Index Fund
Sensex – HDFC Index Fund – Sensex Plan
US exposure – Motilal Oswal Nasdaq 100 ETF

In fact, a friend was just asking me yesterday about the international funds that were recommended to him by his advisor. I suggested he get the Nasdaq 100 ETF and also what his advisor has recommended. Then track them for a year and then decide what to do next.