A Flood Of Passive Products Now Gives Greater Variations For Investors

There has been an increase in the number of new fund offers that are being launched in the mutual fund space. One of the main visible features is that a lot of the new offers are in the passive space covering index and exchange traded funds. This has widened the investment choice and brought a lot of variety in terms of where the investor can get an exposure in their portfolio.

A right choice at this stage will enable investors to fulfil several objectives and, hence, this area needs attention. Here are some areas with additional choices now available for investors.

For a long period of time, there was a debate about the type of mutual fund that should be included in the portfolio. This brought the choice to a selection between an active fund and a passive fund, and this shaped the whole discussion regarding the exposure.

The main point of consideration was about the performance and the cost aspect and whether active funds were able to outperform the passive ones. Now, the discussion has changed as getting the right type of exposure is essential and for an investor, they need not choose between an active and a passive fund.

They can actually ensure that a portfolio has a mixture of both active and passive funds as the need might be. This will mean a welcome addition to the portfolio so that it becomes stronger than before.

One of the main things that has been witnessed in recent times is that there have many passive debt funds that are based on indices that have been launched. The way the passive debt fund works is similar to a passive equity fund, with the difference being that the fund will buy the debt securities that are present in the index. These are bought in the exact weight as seen in the index and rebalanced when required so that the performance of the fund will mirror that of the index.

Indices with varying types of instruments and weightages have been launched. The increasing amount of choice in terms of passive debt funds means that the investor does not have to go about choosing a fund manager based on their style and market outlook. In other words, this makes investing in debt easier for the small investor and one should give a serious look at these options. 

Another area where there has been a massive increase in the number of passive funds has been those related to specific sectors in the equity space. This covers various indices that are sectoral in nature, and these could be things like the auto index or the realty index, and some of them even focus on sub-themes within a sector. It makes the job of the fund house easier in this case as there is no need to worry about the selection of the companies within the sector and that this is already done by the index, which is being tracked.

For the investor too, there is ease of understanding these indices in the sense that there are derivative products on many of these indices and, hence, there is some familiarity present.

There are also a lot of funds that provide some additional feature in terms of using specific measures to separate out the companies that would be included in the portfolio. This would be things like those companies that have a certain financial strength or figures so that the selection becomes better and more robust. Similarly, those that have a low volatility is also another preferred theme that fund houses use when launching such funds. This gives the investor an additional choice for them as they can add some companies with the expectation that they can manage their risk and return expectations.   

The writer is the founder of Moneyeduschool.