How to Build a Passive Portfolio?

Are you looking at a passive approach for your portfolio? Do you want a buy-and-hold strategy to meet your financial goals? You can consider adding passive investments to your equity portfolio. Experts recommend that you allocate at least 30% of your equity portfolio towards passive funds. How can you build a passive portfolio?

What are passive funds?

Passive funds track and replicate the portfolio of an Indian or foreign market index. Moreover, you also have passive funds tracking the domestic price of physical gold. 

The fund manager of a passive fund won’t actively select stocks but replicate a market index. It means you would incur a lower expense ratio than active funds if you pick passive funds for your portfolio. 

You have index funds, exchange-traded funds including Gold ETFs and global fund of funds (FoFs) that track International market indices as passive funds. However, many investors in India do not focus on exchange-traded funds, although they are popular in developed economies. 

How to build a passive portfolio?

You can invest in index funds that replicate a market index, such as the Nifty 50 or the Sensex for your portfolio. For instance, an index fund that tracks the Nifty 50 offers you returns that match this market index. 

However, you must opt for an index fund with a low tracking error. It shows how consistently the fund tracks the relevant market index. You could include index funds for the core of your passive portfolio. 

Experts recommend that you have at least 5%-10% of your portfolio allocated towards gold. You could invest in Gold ETFs or exchange-traded funds that track the domestic physical price of gold to get the requisite holding. Moreover, you can buy and sell Gold ETFs over the stock exchange, such as the NSE or the BSE. 

You can even invest in gold funds to get the requisite allocation towards your portfolio. It is a mutual fund that invests most of its assets in Gold ETFs. You may consider starting a systematic investment plan or SIP to invest in gold funds. 

AMCs offer you the facility to invest small amounts regularly in a mutual fund through the SIP. Moreover, you purchase units of the gold fund irrespective of the gold price, which helps you average out the purchase price of your investment over time. 

You could invest in a global fund of funds (FoFs) for international exposure to your portfolio. It is an Indian mutual fund scheme that invests in foreign ETFs or global scheme units depending on the investment mandate. You could choose a global fund of funds that tracks an International market index such as the Nasdaq 100 and the S&P 500 for your passive portfolio. 

You must invest in passive funds to attain your investment goals only if they match your risk profile. Moreover, you must check the expense ratio of index funds and global fund of funds before inclusion in your portfolio. You may opt for index funds with a lower expense ratio to increase your take-home returns over time. In a nutshell, you must invest in the right passive funds to achieve your financial goals. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in