Published on 1/12/2018 5:04:18 PM | Source: HT Media

ETFs are not suited for all market segments at present

Posted in Mutual Fund Analysis| #Mutual Fund #Wealth

I am looking to diversify my predominantly mid- and small-cap portfolio through either an exchange-traded fund (ETF) or an index fund for some large-cap exposure. I have a time horizon of over 10 years. Please suggest.

—Yash Sanghavi

ETFs allow investors to invest in a broadly diversified index fund at a low cost (compared to traditional, managed funds). However, ETFs are, at least at the present time, not suited for all segments of the market. Funds that focus on some segments of the market, such as mid- and small-cap segments, still do well when they are actively managed. So, in your case, you have done well to go with managed funds for the mid- and small-cap portfolio. To diversify further by adding large-cap exposure, you can consider venturing into ETFs. UTI Nifty Index fund and ICICI Prudential Nifty Next 50 index fund are good options in this regard.

For long-term debt allocation, I invest in UTI Dynamic Bond Fund and Birla Dynamic Bond Fund (10% allocation to each). Should I continue with these funds?


Dynamic bond funds, as a category, have had a very challenging year in these past 12 months. With rising interest rates, the portfolios of these funds with their longer average durations have taken a hit causing NAVs to fall (since bond prices have been going down and holdings in the portfolio have been marked to market regularly). However, in recent months, managers have been steadily adjusting their portfolios and bringing down the duration of their holdings. So, exiting these funds at this time would be the equivalent of selling at a low. My advice would be to hold on to these funds, especially considering your long-term time horizon, and wait for a turn-around.

However, if you are doing an SIP in these funds or thinking to add to your existing holdings, I would advice against that. It would be better to move your future investments to shorter term fund categories such as ultra short-term or short-term funds.