I have Rs 30 lakh. I want to invest it for 10 years. I only want ETFs and Index Funds. Suggest me the mix.
You want to invest for a decade which is a long-term frame, excellent for equity. But you are clear that you are only interested in passive products.
We are clueless about your overall portfolio or your approach to equity. Hence, we encourage you to ask yourself these questions.
Why not actively managed funds?
Actively managed funds are those wherein the fund manager invests in select few securities from his investment universe, which he expects to outperform the benchmark. Exchange traded funds (ETFs) are passively managed funds, in that they track/replicate an index by investing in the same securities as that in the index and in the same proportion. Compared to actively managed funds, index funds/ETFs offer significantly lower expense ratios.
Investors opt for exchange traded funds only if they believe that active managers cannot outperform the benchmark after expenses over their investment horizon. In recent times, most fund managers particularly in the large-cap segment have found it difficult to beat the benchmark. Hence the increased attention towards passive funds and ETFs in recent times.
Are you aware of the working of passive products?
One should be mindful of the risks of investing in passive funds/ETFs such as security concentration risks, and additionally exchange-related liquidity risks in case of ETFs. If the underlying index has no cap on security level weights, the index fund/ETF may turn out to have high concentration to select top-performing securities, which exposes an investor to company specific risks. Exchange-related liquidity risk too is a key risk, since despite the low costs of the ETF, an adverse bid-ask spread may work against investor interest having a significant impact at exit.
Have you considered asset allocation?
You mentioned ETFs and index funds, so am assuming you want an all equity portfolio.
An asset allocation-based (mix of equity and debt) approach should be followed for portfolio construction, as it is one of the key determinants of the portfolio’s performance. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity which have the potential to deliver relatively higher returns compared to fixed income over the long term.
Assuming an aggressive risk profile given the time horizon of 10 years, you can invest with a portfolio mix of about 80% into equities and 20% into fixed-income funds. The equity allocation can be split up as 50% into large caps, 10% into mid caps, 5% into small caps, and 15% into international equities.
The international equity allocation offers diversification across geographies with exposure to different growth drivers, and a hedge against currency risk. Currently in India, only domestic equities have index funds/ETFs representing different market segments (large/mid/small caps) as well as the broader market. Passive international equity exposure is offered by a handful of funds, which are entirely U.S. focused.
There are a few India domiciled passive funds/ETFs offering fixed-income exposure in India, such as Liquid ETFs, 10-year gilt ETFs, and the Bharat Bond ETF/FoFs which invest primarily into AAA-rated PSU entities and G-secs and have a run-down maturity restricting investors from selecting a target duration.
For investment in fixed income, you can consider open-ended accrual fixed income funds with a high credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, and Medium-term funds. As your goal approaches (2-3 years before the goal), shift allocation out of equity into fixed-income funds to lower the risk of drawdowns.
What is the return you are looking at?
Investing your corpus of Rs 30 lakh as per recommended asset allocation, you may be able to attain about Rs 68 lakh at the end of 10 years. The corpus amount has been computed assuming equity market returns of 9.5% per annum and fixed income returns of 5.5% per annum.
It is advisable to stagger your investment corpus across say 3 to 6 months, to benefit from rupee-cost averaging, which seeks to average out the investment cost particularly during times of market volatility.
Do note, these are just broad guidelines. Please consult your financial advisor before making any investment decisions. To evaluate mutual funds across categories, one can look at Morningstar’s star ratings and analyst ratings.