Portfolio construction suggestions for Index investors
Considering the growing popularity of Index investing, here are some portfolio construction suggestions to consider.
What is Index investing #
Index investing is a long-term investment strategy that aims to match the performance of a specific market index. It's a passive approach compared to actively trying to pick individual stocks that will outperform the market.
There are some advantages to index investing:
Lower Costs: Index funds typically have lower fees compared to actively managed funds since they require less research and management. However, also evaluate tracking error — the degree to which a fund's actual returns differ from the index it tracks. A lower tracking error indicates a fund is closely replicating its benchmark.Diversification: By inheriting the composition of the index, you gain diversification across different companies and sectors.Market Returns: The idea is that over the long term, the market will generally trend upwards, and index investing offers a way to capture that growth.
Always invest in the Direct Growth plan of any index fund, not the Regular plan. Index investing's cost advantage depends on keeping expenses low — a Regular plan's distributor commission can silently erode a significant portion of your returns over the long term.
Large cap index portfolio #
Risk profile: Low to Moderate Minimum recommended horizon: 7+ years
This portfolio uses two alternative index strategies — equal weight and value factor — that have historically offered differentiated return patterns compared to standard Nifty 50 exposure. Past differentiation does not guarantee future outperformance.
Allocation: 50% each
Suggested funds #
- DSP Nifty 50 Equal Weight Index Fund Direct Growth
- Motilal Oswal S&P BSE Enhanced Value Index Fund Direct Growth
When comparing index funds tracking the same underlying index, prefer the one with the lower Total Expense Ratio (TER) and lower tracking error, both disclosed on the fund's AMFI page.
Large and mid cap portfolio #
Risk profile: Moderate to High Minimum recommended horizon: 8+ years
This portfolio emphasises diversification across large cap and mid cap segments of the Indian equity market. The Nifty Next 50 (companies ranked 51–100 by market cap) serves as a rough benchmark reference, as it represents the large-to-mid cap transition zone — similar to the return territory this portfolio targets.
Allocation: 60% large cap / 40% mid cap
Suggested funds #
- Motilal Oswal S&P BSE Enhanced Value Index Fund Direct Growth (60%)
- Edelweiss Nifty Midcap150 Momentum 50 Index Fund Direct Growth (40%)
All market cap portfolio #
Risk profile: High Minimum recommended horizon: 10+ years
This portfolio caters to investors with a higher risk tolerance seeking aggressive growth potential, while sticking to index style investing. It proposes a diversified approach across the large, mid, and small cap segments of the Indian equity market.
Exposure to mid and small cap companies offers the potential for amplified returns compared to large cap equities. However, these segments also experience greater volatility.
Allocation: Two options depending on your small cap preference:
Option A (higher small cap concentration):
- Motilal Oswal S&P BSE Enhanced Value Index Fund Direct Growth — 45%
- Edelweiss Nifty Midcap150 Momentum 50 Index Fund Direct Growth — 30%
- Kotak Nifty Smallcap 50 Index Fund Direct Growth — 25%
Option B (broader, lower-volatility small cap exposure):
- Motilal Oswal S&P BSE Enhanced Value Index Fund Direct Growth — 45%
- Edelweiss Nifty Midcap150 Momentum 50 Index Fund Direct Growth — 30%
- Edelweiss Nifty Smallcap 250 Index Fund Direct Growth — 25%
General guidance for all portfolios #
Invest via SIP: These portfolios work best through monthly SIPs into each fund at the specified allocation. Avoid trying to time the market with lump sum investments unless you have a long horizon and can tolerate near-term drawdowns.
Rebalance annually: Review your allocation once a year. If any fund's share has drifted more than 5 percentage points from its target weight, rebalance by redirecting new SIP contributions first, or switch a portion between funds if needed.
Why these specific funds: Passive index funds tracking the same index should be selected primarily on TER and tracking error. The funds listed here were selected for their relatively competitive expense ratios and, where applicable, their unique index methodology (e.g., equal weight, momentum factor, value factor) that is not directly replicated by another fund. Always verify current TER on the fund's AMFI page before investing.
Disclaimer: I am neither a professionally certified financial analyst nor a SEBI-registered investment advisor. The above suggested funds are picked from my own research and should be considered for informational purposes only. They do not constitute professional financial advice or a recommendation to buy. Thorough research and consultation with a SEBI-registered investment advisor is recommended before making any investment decisions.