Alternatives to Mutual Funds for Passive Investors

In recent years, the Indian investment landscape has evolved, with many investors looking for alternatives to traditional mutual funds. While mutual funds have been a popular choice for retail investors, the rise of low-cost, easy-to-manage investment options has given passive investors in India more opportunities to diversify their portfolios and grow their wealth. If you are a passive investor in India, looking for ways to grow your money without constantly monitoring the markets or picking individual stocks, there are several alternatives to mutual funds that could be better suited to your needs.

In this blog, we’ll explore some of the top mutual fund alternatives for passive investors in India. We will cover investment options like Exchange-Traded Funds (ETFs), Robo-Advisors, Direct Indexing, Real Estate Investment Trusts (REITs), Fixed Deposits (FDs), and others. By the end of this article, you’ll have a clear understanding of the various alternatives and how to choose the right one for your investment goals.

What is Passive Investing?

Before we dive into the alternatives, it’s important to understand what passive investing means. Passive investing is an investment strategy where the goal is to match the overall market returns rather than trying to outperform it. The idea is to take a long-term approach to investing, avoiding frequent buying and selling of securities and minimizing costs. Passive investors typically invest in diversified portfolios, often using exchange-traded funds (ETFs), index funds, or other low-cost investment vehicles.

The core philosophy behind passive investing is that markets are efficient, and consistently beating the market through stock picking or timing is very difficult. Therefore, by investing in broad-market indices or asset classes, passive investors can capture market returns over time, while keeping fees low and avoiding the stress of daily market movements.

Now that we understand what passive investing is, let’s look at some of the most popular mutual fund alternatives in India for passive investors.

1. Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) are one of the best alternatives to traditional mutual funds for passive investors in India. An ETF is a type of investment fund that is traded on stock exchanges, similar to stocks. ETFs pool money from investors and use it to buy a collection of assets such as stocks, bonds, or commodities. The key difference between ETFs and mutual funds is that ETFs can be bought and sold throughout the trading day on the stock exchange, while mutual funds are priced once at the end of the trading day.

Why are ETFs a Good Option for Passive Investors?

• Low Costs: ETFs generally have lower expense ratios compared to actively managed mutual funds. This makes them an attractive choice for investors who want to minimize fees and improve long-term returns.
• Diversification: Just like mutual funds, ETFs provide diversification by investing in a broad range of assets. For example, a Nifty 50 ETF tracks the performance of the Nifty 50 index, which includes the 50 largest companies listed on the NSE (National Stock Exchange).
• Liquidity: Since ETFs are traded on stock exchanges, they offer high liquidity. Investors can buy or sell them at any time during market hours, making them more flexible compared to mutual funds.
• Tax Efficiency: ETFs tend to be more tax-efficient than mutual funds because of their “in-kind” creation and redemption process, which reduces capital gains taxes.

Popular ETFs in India include:

• Nifty 50 ETF (e.g., Nippon India ETF Nifty 50)
• Sensex ETF (e.g., SBI ETF Sensex)
• Nifty Next 50 ETF (e.g., ICICI Prudential Nifty Next 50 ETF)

If you’re looking to track the performance of major Indian stock indices like Nifty 50 or Sensex, ETFs are an excellent option that offers broad market exposure at a low cost.

2. Robo-Advisors

Robo-advisors are automated investment platforms that provide portfolio management services with minimal human intervention. These platforms use algorithms to create and manage a diversified investment portfolio based on your risk tolerance, financial goals, and investment horizon. In India, several robo-advisor platforms have gained popularity, providing a hands-off investment option for passive investors.

Why are Robo-Advisors a Good Option for Passive Investors?

• Low Fees: Robo-advisors typically charge lower management fees compared to traditional financial advisors and actively managed funds, making them a cost-effective alternative for investors.
• Automation: Robo-advisors automatically rebalance your portfolio based on market conditions and your risk profile. Once you’ve set up your account, the platform takes care of everything for you, from portfolio selection to rebalancing.
• Diversification: Most robo-advisors invest in ETFs, which means your portfolio is well-diversified across different asset classes such as equities, bonds, and international markets.
• Personalization: Robo-advisors ask you a series of questions about your financial goals, risk tolerance, and time horizon, and then create a customized portfolio based on your answers.

Some popular robo-advisory platforms in India include:

• Smallcase: Offers ready-made portfolios of stocks and ETFs based on themes or market conditions.
• Groww: Known for its simple interface, Groww allows you to invest in mutual funds as well as stocks and ETFs, with personalized investment plans.
• Scripbox: A digital wealth manager that provides automated investment solutions based on your financial goals.

Robo-advisors are a great option for passive investors who want professional portfolio management at a lower cost and with minimal effort.

3. Direct Indexing

Direct indexing is a strategy where an investor directly buys the individual stocks that make up a particular market index, such as the Nifty 50 or Sensex, instead of buying an ETF or mutual fund that tracks the index. This approach allows you to replicate the performance of the index, while also offering the flexibility to customize your portfolio.

Why is Direct Indexing a Good Option for Passive Investors?

• Tax Efficiency: Direct indexing allows you to take advantage of tax-loss harvesting, which can help offset capital gains by selling securities at a loss. This tax strategy can improve your after-tax returns.
• Customization: Unlike ETFs or mutual funds, direct indexing allows you to tailor your portfolio to meet your preferences. For example, you can exclude certain sectors, companies, or even stocks that you don’t want to invest in.
• Cost Control: While direct indexing requires more effort than simply buying an ETF, it can be more cost-effective in some cases, especially for large investors with the ability to buy individual stocks directly.

However, direct indexing can be more complex and may require higher initial investments or a broker that allows fractional shares. As a result, this option might be better suited to high-net-worth individuals or investors with larger portfolios.

4. Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate. Investors can buy shares of these companies, giving them exposure to real estate without needing to buy physical property. In India, REITs offer a convenient way to invest in commercial real estate, which can be an excellent source of income through regular dividends.

Why are REITs a Good Option for Passive Investors?

• Diversification: REITs provide diversification by investing in different types of real estate assets, such as commercial buildings, malls, hotels, and industrial properties.
• Regular Income: Most REITs pay out a significant portion of their income as dividends, making them an attractive option for income-focused investors.
• Liquidity: Unlike physical real estate, REITs are traded on stock exchanges, which means you can buy and sell them with ease.

Some popular REITs in India include:

• Embassy Office Parks REIT
• Mindspace Business Parks REIT
• Brookfield India REIT

REITs can be an attractive option for passive investors looking to gain exposure to the real estate market without the hassle of managing physical properties.

5. Fixed Deposits (FDs)

For risk-averse investors looking for a guaranteed return, Fixed Deposits (FDs) are a popular choice in India. FDs are a low-risk, high-security investment option where you deposit a lump sum amount with a bank or financial institution for a fixed tenure and earn interest over time.

Why are Fixed Deposits a Good Option for Passive Investors?

• Safety: FDs are one of the safest investment options in India, as they are backed by the government’s deposit insurance scheme, which covers up to ₹5 lakh per depositor.
• Fixed Returns: FDs offer guaranteed returns, which can be appealing for conservative investors who prefer stability over high risk.
• Liquidity: Although FDs have a fixed lock-in period, premature withdrawals are allowed (with a penalty), making them a relatively liquid investment option.

FDs may not offer the same high returns as equities or mutual funds, but they are an excellent option for investors seeking safety, stability, and predictable income.

6. National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored retirement savings scheme that allows Indian citizens to invest in a combination of equities, bonds, and government securities. NPS is a long-term investment vehicle, with the goal of building a retirement corpus for individuals.

Why is NPS a Good Option for Passive Investors?

• Tax Benefits: NPS offers tax deductions under Section 80C (up to ₹1.5 lakh) and an additional ₹50,000 under Section 80CCD(1B), making it a tax-efficient investment for long-term investors.
• Low Costs: NPS is a low-cost option for retirement planning. The administrative fees and fund management fees are relatively low compared to mutual funds.
• Diversification: NPS allows you to invest in a mix of asset classes (equities, corporate bonds, government securities) according to your risk tolerance and retirement goals.

NPS is a great option for long-term passive investors looking to build a retirement corpus with the added benefit of tax savings.

7. Gold ETFs and Sovereign Gold Bonds

Gold is often considered a safe-haven asset, especially during times of market volatility. For passive investors looking to gain exposure to gold, there are two popular options in India: Gold ETFs and Sovereign Gold Bonds (SGBs).

Why Are Gold ETFs and SGBs Good Options for Passive Investors?

• Gold ETFs: Gold ETFs track the price of gold and can be bought and sold like regular ETFs on the stock exchange. They offer a convenient way to invest in gold without physically owning the metal.
• Sovereign Gold Bonds: These are government-backed bonds that offer an opportunity to invest in gold at a fixed price. SGBs also provide an annual interest payout, which is an added benefit compared to holding physical gold.

Gold ETFs and SGBs are ideal for passive investors looking for a low-maintenance way to invest in gold.

Conclusion

While mutual funds are an excellent investment option, they aren’t the only choice for passive investors. Depending on your risk tolerance, investment horizon, and financial goals, you can explore alternatives like ETFs, robo-advisors, direct indexing, REITs, Fixed Deposits, NPS, and gold. Each of these options has its own set of benefits, making it important for you to choose the one that aligns with your investment strategy.

Passive investing is all about simplicity, cost-effectiveness, and long-term growth. By considering these alternatives, you can build a diversified portfolio that works for you, without the need for constant monitoring or decision-making.