Ready for Passive Investing? Here's How to Kickstart Your Portfolio
Passive investing offers a straightforward path to market participation. Experts share essential dos and don'ts for beginners looking to build their portfolios with low-cost options.
The Appeal of Passive Funds
Passively managed funds provide investors with a cost-effective way to enter financial markets. These funds feature expense ratios significantly lower than their actively managed counterparts. By tracking the same indices that active funds use as benchmarks, passive funds eliminate the risk of underperforming those benchmarks. Investors essentially own the benchmark itself through these instruments.
Today's passive funds track more than 100 different indices. These include market-cap-weighted indices, sectoral and thematic indices, plus various factor-based strategies. As of September 30, 2025, the market included 268 exchange-traded funds (ETFs) and index funds tracking these indices. ETFs accounted for ₹9.5 trillion in assets under management, while index funds managed ₹3.08 trillion during the same period.
Starting Simple: Expert Recommendations
Financial advisors consistently recommend a simple approach for beginners entering passive investing. M. Pattabiraman, founder of personal finance platform Freefincal, suggests starting with large-cap-oriented equity portfolios. "For most investors who are starting out, a large-cap-oriented equity portfolio is the best starting point. If someone is comfortable skipping mid- and small-caps entirely, a Nifty 50 or a Nifty 100 index fund is more than sufficient," he explains.
Anil Ghelani, head of passive investments and products at DSP Mutual Fund, recommends combining the Nifty 50 Index with the Nifty Next 50 Index. This combination provides exposure to mid-cap flavors while maintaining a large-cap foundation. "It is not a true mid-cap index, but the risk-reward is similar to that of mid-caps, as it represents stocks beyond the widely-tracked Nifty 50 stocks," Pattabiraman adds.
Vishal Dhawan, founder of Plan Ahead Wealth Advisors, suggests considering broader indices like Nifty 100 or Nifty 500 for more comprehensive market exposure. He emphasizes building exposure through systematic investment plans (SIPs) to manage buying costs during market volatility. Broader market indices do carry higher volatility due to their mid- and small-cap components, but they offer greater diversification.
What Beginners Should Avoid
Experts strongly advise new passive investors to steer clear of sector or theme-based indices and factor-based strategies. Pattabiraman cautions that many smart-beta or factor strategies lack adequate real-market track records despite having back-tested data. "These strategies often look very attractive in back-tested data, but real-world performance can be quite different," he notes.
Specific examples illustrate this concern. Some mid- and small-cap quality indices have underperformed in recent years. Low volatility indices, often misunderstood by investors, can still experience significant declines during certain market phases. Aarati Krishnan, head of advisory at PrimeInvestor Financial Research, explains that factor funds tend to underperform their parent indices when bought and held long-term without strategic timing.
Siddharth Srivastava, head of ETF products and fund manager at Mirae Asset India Mutual Fund, recommends avoiding narrow sectors or thematic ideas unless investors possess deep sectoral understanding. "It is better to avoid narrow sectors or thematic ideas when you are starting out, unless the investor has a deep understanding of the sectoral dynamics," he advises.
Index Funds vs. ETFs: Choosing Your Vehicle
Ghelani suggests that new investors typically benefit more from index funds than ETFs. "Investing in ETFs requires a bit more tracking of bid-ask spreads, impact costs, ETF's iNAVs, etc.," he explains. ETFs trade on stock exchanges where prices can deviate from fair value due to liquidity constraints and demand-supply dynamics, unlike index funds that transact at net asset value (NAV).
ETFs can sometimes trade at significant premiums or discounts to their indicative net asset value (iNAV). When trading volumes are thin, exiting positions becomes difficult, potentially preventing investors from receiving fair values. Price distortions occur in two primary scenarios: when high demand meets few sellers (creating premiums) or when lack of buyers meets available supply (creating discounts).
Recent examples include several silver ETFs trading at steep premiums during physical silver shortages. Supply constraints made it difficult for market makers to create new ETF units to meet surging demand. While ETFs allow investors to capitalize on intraday price movements, index funds offer end-of-day NAVs similar to regular mutual funds and support monthly SIP investments.
Building Your Passive Portfolio
New investors can effectively use passive funds for asset allocation strategies. Anubhav Srivastava, partner and fund manager at Infinity Alternatives, suggests combining the Nifty 50 Index with a US index or ETF for international exposure. "Along with this, they can take exposure to a gold ETF or index fund and a debt-based index," he recommends.
Passive funds simplify investing by removing fund manager risk. Investors no longer need to worry about identifying the right fund manager to deliver outperformance. In market segments like large caps, where active fund outperformance has historically been limited, low-cost passive funds often represent the superior choice.
The key takeaway for beginners: start with simple investment strategies using passive funds. Instead of experimenting with new strategies having limited real-market data, stick with approaches that have established market track records. Build your portfolio gradually, diversify appropriately, and maintain a long-term perspective for sustainable investing success.
