There are different types of mutual funds in India. If you invest in ETF, you are investing in a type of mutual fund which are known as passive funds as they aim to replicate the performance of a market index like Sensex, Nifty, Nifty 100, Nifty Midcap, etc. Unlike actively managed mutual fund schemes ETFs do not aim to beat the market benchmark index.
Asset allocation can be achieved by investing across different asset classes so that you can balance risk and returns. Your asset allocation should be according to your risk profile and investment needs. ETFs and mutual funds in India are the most suitable products to achieve your asset allocation objectives.
Benefits of asset allocation
- Asset allocation reduces the overall risk and brings stability to your portfolio.
- Asset allocation reduces portfolio risk since assets like fixed income and gold have lower risks compared to equity or equity mutual funds.
- Asset allocation keeps you disciplined in your investments. You should rebalance your portfolio from time to time to keep it at your target asset allocation.
- Asset allocation changes over time with change in risk profile as you age. As you progress through life, your asset allocation should reflect your reducing risk profile.
How to invest in ETF for asset allocation
If you invest in ETF of different types you can achieve goals of asset allocation.
- Index ETFs: These ETFs invest in different equity market indexes e.g. Sensex, Nifty 50, Nifty Next 50, Nifty 100, etc.
- Gold ETFs: These ETFs represent the INR value of pure 24 carat physical gold. Each unit of Gold ETF represents 1 gram of physical gold.
- Sector ETFs: There are ETFs which invest in various sector indices e.g. Bank Nifty, Nifty Private Bank, Nifty PSU Bank, Nifty India Consumption, Healthcare & FMCG etc.
- Fixed Income ETFs: These ETFs invest in various fixed income asset class / sub-classes like money market, G-Secs, PSU bonds etc. They replicate fixed income indices like Nifty 1D TRI, Nifty 8 – 13 year G-Sec index, NIFTY Bharat Bond Index Series etc.
- International ETFs: These ETFs invest in international indexes like NASDAQ 100, Hang Seng etc.
There are many option, but you should always invest in ETF based on your planned asset allocation framed on the basis of risk appetite and investment needs.
Benefits of asset allocation with ETFs
- Asset allocation through ETFs enables you to get true diversification because you invest in the entire universe (basket of securities) of particular asset classes. Therefore, you may not need to invest in diversified mutual fund schemes.
- Getting more efficient exposures to alternative assets like gold, international equity etc. becomes east if you invest in ETF.
- Similarly, some Fund of Funds of mutual funds may provide you exposure to international equities but their expenses may be higher.
- Finally, you can build a diversified portfolio and manage it according to your asset allocation at much lower recurring costs compared to mutual funds in India if you invest in ETFs.