India’s finance and investment landscape is changing significantly, and one new player gaining traction is direct indexing.
While mutual funds and exchange-traded funds (ETFs) are well-known, direct indexing is becoming more popular as a way to provide investors a more individualised approach to portfolio construction. This essay explores the fundamentals of direct indexing as well as its possible advantages, difficulties, and applicability to Indian investing..
Direct indexing: What is it?
Unlike standard index investing, which usually involves purchasing a pre-packaged basket of equities through an ETF, direct indexing does not follow this approach. Investors who choose direct indexing have the freedom to select specific equities that closely match their selected index.
This strategy differs from the traditional one of purchasing an ETF that replicates a certain index, such the Nifty 50. Investors can directly own shares of particular firms through direct indexing; examples of such holdings are Reliance Industries, HDFC Bank, and Infosys.
The Advantages of Direct Indexing Investments
- Efficiency in taxes
Unlocking the potential of tax-loss harvesting is one of the primary benefits of direct indexing. In order to lower the overall tax burden, this strategic move entails selling failing equities to offset capital gains from others. Such tax-efficient solutions are usually more difficult to adopt for traditional funds.
- Personalisation
Investors can tailor their portfolios according to their particular ideals through the use of direct indexing. This degree of customisation makes it possible to prioritise businesses that support sustainability objectives or exclude contentious firms. This move away from universally applicable index funds offers a more customised investing experience.
- Enhanced Oversight
By giving investors more control and transparency over the movements of their portfolio, direct indexing places them in the driver’s seat. Direct ownership of individual stocks offers a hands-on approach to managing investments, in contrast to standard funds where investors are passive participants.
Obstacles Ahead for Direct Indexing
Direct indexing’s voyage in the Indian market is not without difficulties, though.
- Restricted Entry
India’s market is still in its infancy, in contrast to the established direct indexing platforms in the US. Only a small number of Robo-advisors, such Groww and Kuvera, serve this market at the moment. More widespread accessibility could materialise as the market grows. - Elevated Point of Entry
The greater entrance barrier for direct indexing in India discourages smaller investors. For individuals with smaller portfolios, the majority of platforms have minimum investment requirements ranging from ₹5 lakhs to ₹10 lakhs, making them less accessible. - Regulatory Obstacles
In India, the laws governing fractional ownership of shares are still being developed, which affects how flexible and economical direct indexing is. The environment may become more favourable for the expansion of direct indexing as rules change.
Is the Holy Grail of indexing directly?
Although direct indexing offers a compelling alternative, it is not a universally applicable approach. It has potential for particular groups of investors:
- high net worth People
The advantages of direct indexing in terms of tax efficiency and customisation are most fully realised by investors with bigger portfolios and sizable taxable gains. - Astute Investors
The intricacy of direct indexing may be handled by those who are at ease with research, managing a portfolio, and tracking specific stock movements. - Prolonged Investors
Since direct indexing’s benefits are more apparent over longer time horizons, it is less appropriate for short-term objectives.
A Word of Caution
A word of caution is in order for those who are interested in the possibilities of direct indexing. Do your homework, evaluate platforms and costs, and consult a financial advisor with direct indexing expertise before making any decisions.
Knowing your risk tolerance and investing objectives is crucial since investing is a marathon, not a sprint.
India’s Prospects for Direct Indexing
Direct indexing is expected to develop at an exciting rate in India as competition increases and regulatory barriers become less onerous.
Direct indexing stands out as a star worth monitoring in the changing Indian financial constellation, even though it might not be a fast fix for everyone looking for customised investment strategies and tax optimisation.
A deliberate and knowledgeable strategy would be essential to realising the full potential of direct indexing in the Indian investing landscape as investors traverse this new territory.
