Total market index funds: Ideal for simple, hands-off, long-term investing

Angel One Asset Management Company (AMC) recently launched India’s first Exchange-Traded Fund (ETF) and an index fund based on the Nifty Total Market Index. These funds offer investors broad market exposure in a single fund.

 

Currently, three existing funds in this segment are offered by Mirae Asset Investment Managers (India), Bandhan AMC, and Groww AMC.

 

Broad exposure

 

The Nifty Total Market Index is a free-float, market-cap-weighted index covering 95 per cent of the listed universe. “The Nifty Total Market Index is one of the most comprehensive and liquid indices, capturing 95 per cent of the entire listed universe,” says Sirshendu Basu, head of products, Bandhan AMC.

 

Investors gain exposure to all market segments—large, mid, small, and micro-cap stocks. “The Nifty Total Market Index includes 750 stocks: 100 large caps (69.4 per cent market cap weight), 150 midcaps (17.4 per cent), 250 smallcaps (9.5 per cent), and 250 microcaps (3.7 per cent),” says Siddharth Srivastava, head of ETF product and fund manager, Mirae Asset Investment Managers (India).

 

Cost-effective passive exposure

 

Total market index funds provide cost-effective access to the entire stock market. “The fund automatically rebalances its holdings, minimising the need for active investor intervention,” says Alekh Yadav, head of investment products, Sanctum Wealth.

 

These funds simplify investing. “Investors don’t get bogged down in the details of sector allocation or individual stock selection,” says Basu.

 

A market-cap-weighted index gives higher weight to the stronger companies. “The index includes only the top-performing companies that have demonstrated the ability to generate returns and create value over time,” adds Basu.

 

The diversified nature of the index mitigates risks. “Since this index holds a wide variety of stocks, the negative performance of one stock or sector is often offset by the positive performance of others,” says Basu.

 

Srivastava says these funds can serve as core portfolio holdings.

 

Can’t avoid broad market declines

 

While passive investing is beneficial, it lacks the potential for alpha generation. A total market index-based fund is also vulnerable to market downturns. “Since they invest across all market segments, total market funds can’t avoid broad market declines, making them less effective at limiting losses compared to more targeted strategies,” says Basu.

 

Liquidity can also be a concern due to exposure to small and microcap stocks. “As the fund’s asset under management (AUM) grows, it may end up holding stocks with low liquidity, which may pose challenges,” says Yadav.

 

Alternative: Segmented market strategy

 

Investors seeking flexibility may prefer separate large, mid, small, and microcap funds. “This approach allows for portfolio customisation based on risk profile, time horizon, and return expectations,” says Yadav.

 

Segmented investing enables strategic allocation. “Investors can adjust their allocations based on evolving market conditions or personal views,” says Basu.

 

However, managing multiple funds adds complexity and may increase costs. “Rebalancing across market caps could lead to tax implications,” says Yadav.

 

Timing among market caps can be challenging. “Not aligning the allocation to the right market capitalisation may expose investors to undue risk,” says Basu.

 

Who should go for an all-market fund?

 

Total market funds are ideal for long-term investors who prefer a simple, hands-off approach, making them suitable for those unwilling to manage multiple funds.

 

For investors aiming for higher returns and greater customisation, Yadav suggests opting for separate funds.

 

When selecting a total market fund, Basu emphasises the importance of cost, tracking error, and AUM. He recommends a lower total expense ratio (TER) and tracking error while favouring a higher AUM.