Index products offer considerable diversification for investors looking for passive solutions over more active ones. That said, one should check whether that aligns to one’s investment goals
Low volume. Quality. Momentum. No, these are not the names of latest K-pop albums. These are themes based on which investment products are now being rolled out, thanks to the current craze for indexing. With old-style index products almost fading from the scene, the time for newbie strategies seems to have truly arrived.
Smarter categories of index funds and exchange- traded funds (ETFs) appear to have found takers from among younger investors. The scenario is set to evolve further, a trend already evident from the new fund proposals the asset management industry is lining up. Many of the draft offer documents are for ETFs.
Strategic indices are clearly the rage. Some of them are thematic—a feature that the new-generation allocators seem to accept. Their choice is reflected in the contemporary preference for passive investing strategies (compared to active ones), courtesy ETFs. Ideas, such as smart beta, (promoted by leading players like HDFC MF) are already being welcomed by a niche audience.
Fund houses keen to introduce ETFs are testing new indices like Nifty Growth Sectors 15, Nifty 50 Value 20, Nifty 100 Quality 30, Nifty 100 Low Volatility Index, etc., thanks to the likes of IDFC MF, which believe risk-averse investors will like the idea of low volatility. So a product based on such an index will make a smart choice because less volatile stocks (selected from the Nifty 100 universe) could get higher weightage.
The key question is not whether the newer indices are plain-vanilla or exotic in nature. Their relevance will lie in long-term performance. Yet, some freshly-introduced ideas have practically no track record. Novel products like silver ETFs are far too new to pass the verdict.
What Should An Investor Consider?
The Last Word
Index products can offer considerable diversification. The ordinary investor looking for passive solutions (as opposed to merely active options), is expected to keep up with global practices. Indexing has already generated a formidable following globally. Indian allocators too are weighing index-based investing. ETFs are already drawing a large audience.
For a critical section of new-generation investors, the current preference is a combination of active and passive. Some want passive strategies to form their portfolios’ core, with active playing the role of satellites. Fund houses are also encouraging investors to try both. Intermediation channels must now take up the idea. However, many intermediaries are still inclined towards active and want clients to pursue them aggressively. The pattern is likely to morph in the future; newer and technologically-enabled intermediaries are expected to promote indexing.
Tactical concepts like Nifty 100 Enhanced ESG and Global Ex-US have already found backers. Niche players like Navi India have pursued creative proposals, too, including emerging themes such as metaverse and artificial intelligence.
Viewed against these are other simplier ideas, all seeking regulatory permission. Here is a quick list.
The author is Director, Wishlist Capital