Six equity index fund model portfolios

Published: September 21, 2022 at 6:00 am

This article lists six model equity portfolios by combining different equity index funds. We now have both the evidence and the variety to create such portfolios.

We have mentioned several times in the past that index funds are the way to go for new mutual fund investors. Even in the mid cap and small cap space, index investing is the choice.

We now have variety in the equity index fund space, but tracking errors can be huge beyond the top 100 stocks sorted by free-float market capitalization. So we need to tread carefully. See: Not all index funds are the same! Beyond top 100 stocks tracking errors are huge!

When we refer to “portfolio” here, we refer only to the equity part. For stability, a proper investment portfolio should have a good dose of fixed income. There is no preferred or “best” model. All of them are fairly equivalent. Which one we choose is up to us. Please note that the following is our opinion and not an exhaustive list of ways index funds can be combined.

Model 1: Nifty or Sensex Index fund. One fund. That is it. Additions to this are almost always driven by a sense of missing out. This is a smart, simple choice. Remember that aggressive investors are not those who take on more risk. Aggressive investors are those who increase their income and, therefore investments aggressively.

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    Note: There is not much difference between Sensex and Nifty index funds. However, Sensex ETFs and Nifty ETFs are not the same!

    Also, we recommend not using any ETF for investment. The price-NAV differences can sometimes be significant and take a long while to sort out. You are not as free to redeem from an ETF as from an index fund.

    Model 2: Nifty or Sensex Index fund + Nifty Next 50 Index fund. For weights, see: Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios. It must be understood that the NIfty Next 50 can be a frustrating index to hold from time to time. So one must be ready for this. See: Is it time to exit from Nifty Next 50?

    Model 3: Nifty 100 Index fund. See: Axis Nifty 100 Index Fund Performance Report

    Model 4: S&P BSE Low Volatility 30 fund. Suppose you don’t mind being a little adventurous and investing in a factor-based large and mid cap index with little tracking error history. It may not be the most prudent choice one would come across, but as a model portfolio, it is one. See: UTI S&P BSE Low Volatility Index Fund Review

    Model 5: Nifty or Sensex Index fund + S&P BSE Low Volatility 30 fund. Here the factor-based index can play a much smaller part, say 20-25%. Those who wish to take on more risk can replace the low volatility index with an Alpha + Low Vol index fund. See: Nippon India Nifty Alpha Low Volatility 30 Index Fund Review

    Model 6: Nifty or Sensex Index fund + (20-30%) Nifty Midcap Quality 50 Index fund. For those who wish to replace the Nifty Next 50 with a “proper” midcap index. The quality factor is arbitrarily defined and may not always outperform its Midcap parent. The Quality 50 index may have much higher tracking errors than Nifty/Sensex funds. See: DSP Nifty Midcap 150 Quality 50 Index Fund Review

    There are plenty of other index funds to choose from: Midcap, Small cap, Equal-weight, Large Midcap, Alpha, Value, Momentum, sectoral etc. This is the full list: List of Equity Index Funds in India. One can also use them for creating such model portfolios, but as of now, we are not inclined to do so.

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