 "Restrict exposure to sectoral ETFs")
Retail investors will soon have multiple options to invest in exchange-traded funds (ETF). With a number of fund houses gearing up to launch these products, there will be a lot of variety as well. The question for the investor is whether to join the ETF party.
Since ETFs follow the index with respect to portfolio composition and weights proportion of shares, they assure a certain amount of stability to one’s investment portfolio. But they are passive funds and the returns could be lower when compared to actively-managed mutual funds. On the other hand, ETFs cheaper.
No wonder, then, that even fund houses recommend actively-managed funds. Nimesh Shah, managing director and CEO of ICICI Prudential AMC, says ETFs are meant for high net worth individuals or evolved investors who want to take exposure in specific sectors. “In India, most of the actively-traded mutual funds beat the index. As long as fund managers are able to generate alpha, it makes more sense for retail investors to invest in mutual funds, even though ETFs are cheaper,” says Shah. Some of the ETFs waiting the market regulator’s approval are SBI-ETF 10-year Gilt, ICICI Prudential Bank ETF, Reliance MSCL India Domestic ETF, R*Shares CNX Mid-cap ETF and R*Shares NV20 ETF.
For a retail investor, ETFs should form that part of your portfolio which you would otherwise invest directly in stocks, says Amit Kukreja, founder, WealthBeing Advisors. “Investing in ETFs is less risky than directly investing in stocks. Also, since the index has only blue-chip companies, exposure to ETF will also give you exposure to good quality stocks,” he says.
If your portfolio has large-cap, mid-cap and multi-cap funds, then you can include ETFs within the same break-up based on the ETF's composition. Also ensure that the exposure to ETFs does not exceed 10 per cent of your total equity portfolio, adds Kukreja.
An investor who has so far been investing only in large-cap funds can include large-cap ETFs in the portfolio, too. The share can be 50:50 for large-cap funds and ETFs. However, if you want to include mid-cap or small-cap stocks in your portfolio, then it is better to do so through mutual funds. In that case, allocate 50 per cent of your portfolio to large-cap ETFs, 30 per cent to mid-cap funds and 20 per cent to small-cap funds, advises Alam Tanwir Alam, founder and managing director, Fincart, a financial planning and advisory firm.
“In case of mid-cap and small-cap stocks, it is better to go through the mutual fund route since the fund manager will do the stock selection. But in case of large-cap stocks, you can take some exposure through ETFs also,” he explains.
According to Nath, sectoral ETFs are riskier and are meant only for those investors who can take a short-term call on the sector. For instance, he recommends investing only five-seven per cent of the fixed income portfolio in the SBI-ETF 10-year Gilt, which will be benchmarked to the 10-year gilt index. “Given that interest rates are likely to be benign over the next one-to-two years, investors can participate in government securities by investing in the ETF, rather than locking into a mutual fund. This will give them transparency in pricing and will not be dependent on a fund manager,” he explains.
Since ETFs follow the index with respect to portfolio composition and weights proportion of shares, they assure a certain amount of stability to one’s investment portfolio. But they are passive funds and the returns could be lower when compared to actively-managed mutual funds. On the other hand, ETFs cheaper.
No wonder, then, that even fund houses recommend actively-managed funds. Nimesh Shah, managing director and CEO of ICICI Prudential AMC, says ETFs are meant for high net worth individuals or evolved investors who want to take exposure in specific sectors. “In India, most of the actively-traded mutual funds beat the index. As long as fund managers are able to generate alpha, it makes more sense for retail investors to invest in mutual funds, even though ETFs are cheaper,” says Shah. Some of the ETFs waiting the market regulator’s approval are SBI-ETF 10-year Gilt, ICICI Prudential Bank ETF, Reliance MSCL India Domestic ETF, R*Shares CNX Mid-cap ETF and R*Shares NV20 ETF.
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ETFs can help investors who know when to enter or exit the market and don't want to depend on a fund manager. “These investors can invest smaller amounts of money directly through,” says Raghvendra Nath, managing director, Ladderup Wealth Management.
For a retail investor, ETFs should form that part of your portfolio which you would otherwise invest directly in stocks, says Amit Kukreja, founder, WealthBeing Advisors. “Investing in ETFs is less risky than directly investing in stocks. Also, since the index has only blue-chip companies, exposure to ETF will also give you exposure to good quality stocks,” he says.
If your portfolio has large-cap, mid-cap and multi-cap funds, then you can include ETFs within the same break-up based on the ETF's composition. Also ensure that the exposure to ETFs does not exceed 10 per cent of your total equity portfolio, adds Kukreja.
An investor who has so far been investing only in large-cap funds can include large-cap ETFs in the portfolio, too. The share can be 50:50 for large-cap funds and ETFs. However, if you want to include mid-cap or small-cap stocks in your portfolio, then it is better to do so through mutual funds. In that case, allocate 50 per cent of your portfolio to large-cap ETFs, 30 per cent to mid-cap funds and 20 per cent to small-cap funds, advises Alam Tanwir Alam, founder and managing director, Fincart, a financial planning and advisory firm.
“In case of mid-cap and small-cap stocks, it is better to go through the mutual fund route since the fund manager will do the stock selection. But in case of large-cap stocks, you can take some exposure through ETFs also,” he explains.
According to Nath, sectoral ETFs are riskier and are meant only for those investors who can take a short-term call on the sector. For instance, he recommends investing only five-seven per cent of the fixed income portfolio in the SBI-ETF 10-year Gilt, which will be benchmarked to the 10-year gilt index. “Given that interest rates are likely to be benign over the next one-to-two years, investors can participate in government securities by investing in the ETF, rather than locking into a mutual fund. This will give them transparency in pricing and will not be dependent on a fund manager,” he explains.