Moving from ETFs to Index funds

TLDR: Moving away from ETFs to index funds - My personal portfolio

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If you really have to know whether a financial advisor is following his recommendations, then get him/her to post their portfolio wide open on the internet.

I am not a financial advisor and My posts are not recommendations for anyone reading the blog to replicate without independent research.

I am using this blog as a platform to bring in transparency on my FIRE journey and hold my past self accountable to my future self.

Now that we have that out of the way. I have been consistently posting my ETF portfolio on a quarterly basis, all ETF investments, how they compare against the benchmark indices and why I buy the ETFs the way I buy them for everyone to see.

In the recent quarters you will clearly see a trend of my decreasing investments in ETFs quarter on quarter. The reason for that is that I am slowly moving away from ETFs to Index funds via Kuvera. I will explain why shortly, but before that let me quickly summarise the differences between the ETFs and Index funds.

ETF vs. Index funds

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Motilal Oswal

The above image provides a good summary of the difference between ETFs and index funds. But my reason for slowly transitioning to index funds are not fully covered here and it boils down to these 2 factors

Challenges with ETFs

• Transaction costs

  • I have some employer related restrictions which does not allow me to choose a zeroadha or other low cost brokers. I am stuck with ICICIDirect.

  • This means that I have to shell out roughly 1% (each leg) for my ETF purchases

  • Losing 2% might not sound like a lot, but it is.

• Liquidity

  • Indian ETF market is still not very mature, so liquidity is still a concern for ETFs

  • Poor liquidity can lead to poor price discovery and inability to sell in case of an emergency. (Not that I would need to, but nobody knows what the future holds)

Potential negatives with index funds

• Total expense ratio (TER)

  • The majority of the funds that I have recommended in the blog have a relatively small expense ratio, so most cases this should not be a problem as of Nov 2019

    • UTI NIFTY

      • TER - 0.1 %

      • AUM - 1,581 Crores

    • UTI NIFTY next 50

      • TER - 0.27 %

      • AUM - 444 Crores

    • Motilal Oswal Mid cap 150

      • TER - 0.38 %

      • AUM - 21 Crores

• Tracking Errors

  • Both of the UTI index funds are fairly large in AUM, so a big redemption should not have a massive impact on the tracking

  • Motilal Oswal is a new fund, less than a couple of months old, so the AUM is quite small. Hopefully more investors discover this fund and it gets big enough to minimise tracking errors.

Conclusion

I am planning to provide updates on my ETF and index fund portfolio in the future on the same frequency as before. Those posts seem to be the most popular because of our voyeuristic tendencies to see how the other person is doing so that we can compare against how we are doing. So I plan to continue to satisfy the demand. :-)

Happy Investing.