Mutual funds: Should you create a large-cap index fund portfolio?
In May 2018, the total assets in Exchange Traded Fund (ETF) crossed $ 5 trillion in the global market. Indian ETF markets are also growing significantly. However, in Indian markets, as active is a well-established strategy and passive is slowly getting a foothold, a combination of the two via core satellite can allow both strategies to be at play.
In May 2018, the total assets in Exchange Traded Fund (ETF) crossed $ 5 trillion in the global market. Indian ETF markets are also growing significantly. However, in Indian markets, as active is a well-established strategy and passive is slowly getting a foothold, a combination of the two via core satellite can allow both strategies to be at play.
The benchmark S&P BSE SENSEX consists of large-cap companies and many passive strategies and investment are linked to it today. The Indian market also hosts a wide range of active funds in this space. However, the SPIVA India Scorecard has highlighted how the benchmark, in this case the S&P BSE 100, has outperformed active funds. It does make one wonder if, rather than going through the effort and spending time sorting through and picking an active strategy, isn’t it, may be easier to replicate an index or follow an index fund or ETF?
Low concentration risk
An advantage of index-based investing is low concentration risk. For example, the S&P BSE 100 spreads across a broad basket of 100 securities diversified across sectors. For a more concentrated basket, the S&P BSE SENSEX 50 seeks to measure a group of 50 stocks, while the S&P BSE SENSEX seeks to track a set of 30 stocks.
Efficient risk management
Diversification can help with efficient risk management. An index measures a basket of securities, with an additional benefit of a wide sectoral exposure. Each of the S&P BSE LargeCap Indices provides exposure across 10 sectors, as per BSE sectoral classification, with various weights. For instance, sector weights of the S&P BSE LargeCap Indices, are led by finance at over 30%, consumer discretionary and fast moving consumer goods at over 10%, and basic materials, industrials, and IT.
Options for different risk/return profiles
Given that there is a variance in the sectoral balance in each of the large-cap indices, the performance of the indices varies and can provide options with different risk/return profiles. A look at the performance of the sectors in the last few years can provide a perspective as to how the different sectoral exposures aggregate to a performance characteristic for the indices.
By, Koel Ghosh
(The writer is business head, S&P BSE Indices)
Source: DNA Money
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