Why you should invest 25% of portfolio in Index funds

Value Research data showed that large-cap and multicap funds yielded 6.78% and 0.72%, respectively. The mid-cap category lost 8.2%.

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Wealth managers have increasingly begun allocating about a fourth of an investor’s equity mutual fund corpus to passive index funds, reflecting a change in investment strategy after returns from actively managed plans failed to exceed gains in broader-market benchmarks over the past one year.

While the Nifty returned 11% in the past one year, Value Research data showed that large-cap and multicap funds yielded 6.78% and 0.72%, respectively. The mid-cap category lost 8.2%.

  • -2.07%Annualized Return for 2 year
  • >3 years Suggested Investment Horizon
  • N.ATime taken to double money
“Index funds are low-cost, truly diversified portfolios with no human bias. In an index fund, you are fully invested while an actively managed fund has some cash holding or can take a cash call,” said Harshvardhan Roongta, a Mumbai-based financial planner.


Roongta recommends deploying 25% of an equity portfolio in an index fund, with the balance 75% being split across actively managed funds across large caps, multicaps and midcaps, reflecting an investor’s risk profile.

“Index funds work as a supplement strategy, especially in the large-cap space,” said Rohit Shah, founder, Getting You Rich.

Financial planners believe the biggest advantage of an index fund is its low cost structure with passively managed funds in regular plans charging as low as 27-75 basis points. By contrast, actively managed equity funds could charge 150-225 basis points in the regular plan. Index fund investors could also opt for exchange traded funds (ETFs) where expenses are even lower, but that could mean maintaining a demat account and paying brokerage when buying or selling.
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Financial planners point out that after Sebi norms on categorisation and rationalisation of mutual fund schemes, large-cap stocks are mandated to hold 80% of their portfolio in top 100 stocks by market capitalisation, making it difficult for them to generate alpha. Earlier, many such large cap funds took exposure to mid and small-cap stocks and generated alpha.

Actively managed equity funds have failed to outperform passive funds as returns in the last one year were skewed, with about 90% Nifty gains coming from six stocks — Reliance Industries, HDFC Bank, Axis Bank, TCS, Infosys and ICICI Bank.

Fund houses have increased passive-investment products over the past couple of years. Recently, Indiabulls launched Nifty 50 ETF, while DSP Mutual Fund has increased its offering in the space with twin funds — DSP Nifty 50 Index Fund and DSP Nifty Next 50 Index Fund. SBI MF has launched a smart-beta ETF, a hybrid between the traditionally passive and active strategies.

Index funds shine
1-year returns (%)
Large cap 6.78
Large & Mid cap -1.98
Multi cap 0.72
Mid cap -8.20
Small cap -14.50
S&P BSE Sensex 13.32
As on April 24, 2019; Source: Value Research
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