Source | https://economictimes.indiatimes.com : By Sanket Dhanorkar
Cost differential should not be the only factor to consider while investing. Passive investments should be added as a complimentary strategy in any investor’s portfolio, Anil Ghelani tells ET Wealth.
ETFs are relevant in efficient markets, where index outperformance is difficult. Where do these funds stand in India?
Multiple reasons have driven the growth of passive investments like index funds and ETFs in developed markets. There is a trend of managers finding it difficult to outperform the benchmark index, prompting investors to shift to lower cost passive funds.
In India, active management will continue to retain the potential to generate alpha by outperforming the benchmark. However, this is becoming increasingly challenging, especially in the large-cap space. Recent analysis of large-cap performance shows more than 50% of the active funds underperformed the benchmark across 1, 3, 5 and 10 year periods.
While the debate of active versus passive will continue, what Indian investors need is a blend of both. There is need to adopt both styles through a “core and satellite” portfolio management style to mitigate the risk of underperformance. The investor may expect better risk-adjusted returns by having a core portfolio of passive funds that grows in line with the broader market, ensuring index returns, and a satellite portfolio that attempts to generate alpha.
When we launched DSP BlackRock Equal Nifty 50 Fund, our first passive fund, we positioned it as a “complimentary” and not a competing strategy, with the aim to access large-cap equities in an investor’s portfolio.