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Passively managed funds and portfolio allocation
- Portfolio allocation can be divided into core and satellite components.
- The core component should remain stable unless significant market or fund changes occur.
- The satellite component allows for tactical decisions based on current market conditions.
- Passive funds involve fund managers mimicking an underlying index without making active decisions.
- Returns from passive funds closely track the underlying index with minor discrepancies due to expenses.
- Passive funds are available for various asset classes like equities, debt, and commodities.
- Passive funds can be in the form of ETFs listed on exchanges or Index Funds tradable with the AMC.
- Active funds aim to beat benchmarks but often come with higher expenses.
- If active funds consistently underperform, investors may opt for passive funds with similar returns to the index.
- Passives can be part of the core or satellite portfolio based on risk tolerance and investment objectives.
- Having passives in the core portfolio is gaining popularity for long-term wealth accumulation.
- The satellite portion of the portfolio is designated for higher-risk investments and tactical calls.
- Over 50% of active funds fail to outperform their benchmarks, especially in large-cap categories.
- Investors should consider active funds for opportunities where fund managers can outperform and passives for market-like returns.
- Where higher returns are desired, active funds can be allocated to the satellite portion of the portfolio.
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