HOW TO PICK PASSIVE MUTUAL FUNDS? RADHIKA GUPTA SHARES FOUR TIPS

With passive mutual funds evolving over time, one should always do a little more nuanced analysis before investing, said Radhika Gupta, CEO of Edelweiss Mutual Fund. According to the CEO, with the market seeing new forms of passive funds it is important to do important analysis beyond just what is the expense ratio and what is the tracking difference. Gupta also shared four tips on how one should analyse passive funds before investing.

She posted on social media platform X, Passive funds have evolved. Have you? As the market sees new forms of passive funds - global, thematic, equal weight, factor - the questions we ask have to go beyond just tracking difference and expense ratio. Here are 4 tips.”

Here are four things that one should keep in mind before making investments in passive funds, according to the CEO.

1. Check the concentration particularly if you’re investing in some of these sectoral ideas. If 50 - 60% of the fund is in a couple of stocks, two, three stocks you might have a little bit of a red flag there. Check the PE ratio of the sector you’re investing in. You probably don’t want to be investing in something with 100 PE.
2. Check the exposure to mid and small caps. For instance, if you’re invested in an equal weight fund and it’s 500 stocks a lot of that weight is going to be in mid and small cap Make sure you’re okay with that.
3. If you are looking at a factorial passive fund which is very popular do remember that different factors have different cycles. Momentum works sometimes, quality works sometimes. You may also want to look at a multi-factor fund that blends approaches.
4. If you’re investing in an ETF in particular, it’s very important to check premiums and discounts. Sometimes things that are very popular. China these days have ETFs that are trading at 20-30% premium to the actual price. That means you're buying something 20-30% higher. You might have a hard time making money

She also mentioned that one should do these checks and check every fund in an individual and nuanced way. This will make them a happier and better passive investor.

Gupta wrote, “Make sure you do these checks and check every fund in an individual and nuanced way. It’ll make you a happier and better passive investor”

The CEO in her earlier posts mentioned that one needs to move beyond the buckets of active versus passive and has to start understanding funds for what they are individually. There are many brilliant active funds and terrible passive ones and vice versa also. One should focus on the unique characteristics of each fund rather than relying only on the category.

She posted on social media platform X, “I will get trolled for saying this, but we need to move beyond the buckets of active vs. passive and start understanding funds for what they are individually - good or bad. There are brilliant active funds out there, and terrible passive ones. The reverse is also true.”

According to Gupta, as the passive funds category is new and evolving, more rigour needs to be applied at the index behind the fund. For the passive funds, one should always evaluate index construct, methodology, valuations, weighting, market cap exposure. This is not simple as buying an index fund based on last one or three year returns.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)