Asset Allocation through ETFs

Asset allocation is a strategy to diversify your investment across different asset classes. Different asset classes like equity, fixed income, gold etc have different risk / return characteristics. By investing across different asset classes you can balance risk and return. Your asset allocation should be according to your risk profile and investment needs. Research shows that asset allocation is the most important performance attribution factors of portfolio returns.

Benefits of asset allocation


What are ETFs?

Exchange Traded Funds or ETFs are passive funds which aim to replicate the performance of a market index like Sensex, Nifty etc. Unlike actively managed funds, ETFs do not aim to beat the market benchmark index. ETFs also replicate the price of commodities like Gold. ETFs are listed in stock exchanges and trade in exchanges just like shares of listed companies. You need to have demat and trading account with a stock broker to invest in ETFs. You can buy or sell ETFs in the stock exchange during market hours at prevailing market prices. You can also invest or redeem ETFs with the AMC in lot sizes specified by the AMC for the ETFs.

Benefits of ETFs

  • Fund managers of actively managed schemes have to be overweight / underweight on some stocks / sectors relative to the benchmark. As a result there is some unsystematic risk (stock or sector specific risk) in addition to market risk in actively managed funds. ETFs, on the other hand, invest in a basket of securities which represent a particular market index. For example, a Nifty 50 ETF will invest in all the 50 stocks which constitute the Nifty 50 index in the same weight as it has in the index constitute. Therefore, there is no unsystematic risk in ETFs; they are subject only to market risks.
  • ETFs which track market cap weighted indexes automatically have lower weights for underperformers and higher weights for strong performers. This is due to the index methodology.
  • It is much simpler to invest in ETFs compared to actively managed funds. There are a number of factors to consider in selecting active funds viz. fund category, performance track record of the fund manager in different market conditions, how many years the fund manager has managed the scheme, investment strategy of the scheme, expense ratio etc. When selecting ETFs you have to decide which asset class (e.g. equity, debt etc) and then invest in a low cost ETF.
  • The biggest advantage of ETFs is low cost. The TER of an ETF can be 1.5 to 2% lower than actively managed funds. On an investment of Rs 10 lakhs you may be gaining as much as Rs 15,000 – 20,000 every year in ETF compared to an actively managed fund (assuming same performance before expenses). Over long investment tenures this can result in considerable difference in returns due to the power of compounding.

Asset allocation through ETFs


Benefits of asset allocation with ETFs


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Disclaimer: The calculators are based on assumed rate of returns and meant for illustration purposes only. The calculators are designed to assist you to get a better understanding on how returns would have panned out in various scenarios. This calculator alone is not sufficient and shouldn’t be used for the development or implementation of any investment strategy. In the preparation of the calculator, Mirae Asset Mutual Fund (MAMF) has tied up with Advisorkhoj who have developed and integrated the calculator with our website. The calculator uses information that is publicly available and information developed in-house. Information gathered and material used in this calculator is believed to be from reliable sources. MAMF however does not warrant the accuracy, reasonableness and/or completeness of any such information. The examples do not purport to represent the performance of any security or investments. It is neither an investment advice nor should it be construed as indicative of any of the schemes of Mirae Asset Mutual Fund. Invest as per your risk appetite and time horizon. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax advisor before taking any investment decision. Contact your financial advisor for detailed insight into the investment advice. Mirae Asset Global Investments (India) Private Limited (the AMC) shall have no responsibility/liability whatsoever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts no liability for any loss or damage of any kind.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.