With financial planning and retirement becoming mainstream, investment advice is aplenty, but do-it-yourself savers must choose products carefully, suggests Rachit Chawla, founder and chief executive officer, Finway Capital, in an interview with Sunitha Natti of TMS. Excerpts:
Why are index funds and ETFs better than large-cap funds?
Amid uncertainty, inconsistent market performance and unsteady growth of non-indexed companies, index funds and exchange-traded funds (ETFs) are better than large-cap funds because of the broader portfolio choice comprising blue-chip companies, which provides stability to an index. Besides, index funds and ETFs work on less risk, less cost, but decent return principle, whereas large-cap funds are restricted to only 100 companies based on their market capitalisation. In addition, they accrue more cost as expense ratio in large-cap funds that varies from 2-2.5 per cent, while index funds and ETFs on the Nifty have an expense ratio as low as 0.1 per cent.
How can index funds be a positive force for change?
Being passive doesn’t mean rigid, but a bit more poised and cautious. In India, the concept of index funds is now gaining traction because in the past year, investors couldn’t generate fair returns from large-cap mutual funds. Out of the 32 large-cap funds, only two could beat their benchmark. The performance of the rest of the large-cap funds was pretty disappointing.
Why should one prefer active equity mutual funds to index funds?
It is very much certain that active equity mutual funds will perform better in the long run because of better price discovery in stocks. And, as active equity funds across categories are expanding over a period of time in initial investment categorisation, the scope of equity mutual funds is quite bright in India.
How can you diversify your investment portfolio?
It would be best if you diversified your investment portfolio by having companies of different sizes and industries and investing in index funds that contain dozens of stocks. You should be clear about the investment goals, and the decision should be based on the amount you need to invest to realise those goals. Seek the help of a financial planner to get proper planning. Increase the investment as your income grows and review your investments at the end of every year.
Why is investing in mutual funds beneficial?
Mutual Funds are supposed to be one of the secured options when it comes to long-term financial planning. They are professionally managed and invested products, which act as the protection to investors against market risks such as inflation and heavy taxation. But before investing, ensure you have adequate insurance if you are already an investor or are planning to invest in the market. To avoid any contingency, you should have adequate coverage for yourself and family members. Ideally, one should have insurance cover of at least ten times of your income.