Making the Choice: Eye on Passive Large-Cap Index Funds

Passive large-cap index funds are the ideal choice if gaining higher returns is the motive. The reason is most actively managed large-cap index funds have underperformed their benchmark indices in 2022. These were the findings of a recent report.

Another factor is, in a volatile market, passive large-cap index funds are known to continue performing fine with respectable returns. 

Also, the performance of active funds is dependable on the decisions of the fund manager and there is a possibility that they may not always be right. 

Going by the numbers, at least 84 new index funds were introduced, raising the assets under management (AUMs) to Rs 1,67,517 crore, a jump of about 143% in the fiscal year 2023, as per the data of the Association of Mutual Funds in India (AMFI).

Similarly, about 36 new exchange-traded funds (ETFs) schemes were introduced, leading to a rise in the total AUMs to Rs 4,84,277 crore during the year. This is 17% in a span of a year.

However, an investor should also consider their financial goals as well as risk appetite before investing. For example, an investor with a high-risk appetite can consider investing about 50-60% of the investment portfolio in passive large-cap index funds. 

So, in order to get large-cap exposure in a portfolio, it’s advised to opt for passive large-cap index funds based on Nifty50 or S&P BSE Sensex. An investor can also look at Nifty-Next50-based index funds.

Also, an investor should invest based on the tracking error and expense ratio that a company may be providing. Generally, large-cap index funds are available at a quite low expense ratio. 

Experts are of the opinion that as mutual fund houses introduce more new innovative products based on passive strategies, passive funds are likely to register sustained growth. When it comes to portfolio diversification, passive strategies are likely to offer suitable avenues.