Simplify investing: Allocate bulk of core portfolio to broad index fund

Owning diversified funds can be beneficial amid a broad-based stock market rally. Index funds tracking broad markets, such as the Bandhan Nifty Total Market Index Fund (BNTM) and Axis Nifty 500 Index Fund (AN500), whose new funds offers are on, offer such exposure.

BNTM tracks the Nifty Total Market Index, which includes 750 stocks across large, mid, small, and microcap segments. AN500 tracks the Nifty 500 Index, comprising the top 500 companies by market cap across large, mid, and smallcap segments. While both indices are heavily tilted towards largecap stocks, they also include small and midcaps.

“Opting for a total market fund makes investing simple, convenient, and effective,” says Sirshendu Basu, head of products, Bandhan Asset Management Company (AMC).

Broad spectrum investing

These index funds eliminate the complexity of selecting individual schemes. Investors do not have to worry about how much to put into various market caps. For instance, the Nifty Total Market Index covers 95 per cent of the market cap of the listed stock universe. “Investors benefit from comprehensive stock coverage from largecap to microcap stocks and wide sectoral coverage,” says S Sridharan, founder and chief executive officer (CEO), Wallet Wealth.

These indices are less volatile compared to mid or smallcap-focused portfolios. “The diversity of stocks and sectors ensures that extremely volatile periods do not impact portfolio returns as much,” says Vandana Trivedi, head of institutional business and passives, Axis Mutual Fund (MF).

Sometimes, investors tend to over-allocate to certain market caps or segments in bullish conditions based on past returns. “There is no scope for such mistakes upon investing in broad market index funds,” says Deepesh Raghaw, Sebi registered investment advisor (RIA).

Being passively managed, these funds have no fund manager risk. They also have lower costs compared to actively managed equity schemes. “Typically, these funds operate at less than half the expense of active funds,” says Trivedi.

No scope for outperformance

These schemes are unlikely to top the performance charts. “If an investor is convinced about the sharp growth prospects of a specific sector, market cap, or theme, a narrower index fund representing those segments would be a better fit,” says Trivedi.

Watch out for higher tracking errors in these funds (compared to a Nifty 50 fund). “This could happen due to the lower liquidity in small and microcap stocks,” says Raghaw.

Ideal for new investors

These schemes are ideal for investors without access to investment advisors. “New investors or those with a good risk appetite who plan to stay invested for the long term will find them suitable,” says Sridharan.

These funds can form the core of an equity portfolio. “A broad market index fund can be the foundational building block in an investor’s core portfolio, supplemented by active funds,” says Trivedi.

Investors can have significant exposure to these schemes. “A fund offering broad market exposure can constitute 60-70 per cent of an investor’s core portfolio,” says Basu. In the satellite portfolio, investors can take aggressive bets, using factor funds, and actively managed funds, among others.

Hold these funds for an extended period. “An equity-based index fund should be held for more than five years to average out market volatility and achieve financial goals,” says Sridharan. Invest through a systematic investment plan.