We had discussed the several benefits of ETFs in chapter 2 of this module. Does it mean that, you should not invest in actively managed equity funds? The answer is not simple. Both ETFs and actively managed equity funds have their advantages (see the table below).

ETFs	Active equity funds
Low Cost	Possibility of getting superior returns (alpha)
No Unsystematic Risk	Invest through SIPs
Simpler to invest	Redemption with AMC at applicable NAVs

Since both active funds and ETFs have their own set of advantages, they can complement one another in an equity portfolio. You should always take a portfolio view and consider the following in constructing / managing your equity portfolio. Let us discuss how ETF help supplement active equity funds:-

• New investors: For young or new investors, it is easier to start investing in mutual funds. All you have to do is, furnish your KYC documents, select a fund according to your investment needs and start investing. For ETFs, you need to select a stock-broker / platform, open demat and trading accounts before you start investing.
• Financial goals: You should always invest according to your financial goals. Mutual fund systematic investment plans (SIP) is a disciplined and convenient way of investing for your long term financial goals like retirement planning, children’s higher education, children’s marriage etc from your regular savings. You cannot setup up a bank mandate for investing systematically in ETFs because like regular mutual fund schemes you cannot buy fractional ETF units. Mutual funds are more suitable for investing for your long term goals through SIPs.
• Alphas for wealth creation: Despite their higher costs, some active equity funds have the potential of generating alphas (higher than market returns). Equity fund categories like midcaps and small caps have much larger universe of stocks to select from. Alpha generation is possible in these equity categories through superior stock selection. However, you need to look at the long term track record of the fund manager across different market conditions to see if the scheme has consistently created alphas before investing. You may also consult with your financial advisor if required.
• Tactical investing: Deep market corrections offer ideal tactical investment opportunities to get higher returns in the future. ETFs are good instruments for such tactical investments without taking unsystematic risks. When market falls sharply, you can increase your asset allocation in equity through ETFs.
• Asset allocation: ETFs are useful for rebalancing or managing your asset allocation. If your asset allocation in equity is too high or too low, you can buy / sell ETFs to rebalance your asset allocation from time to time. Unlike many active funds, there is no exit load in ETFs. Moreover, when you are buying or selling ETFs, you do not have to worry about, whether you are buying or selling a good or bad fund; you are simply increasing or reducing your exposure to an asset class.
• Tax Savings: Mutual fund equity linked saving schemes (ELSS) allow investors the opportunity save taxes along with the potential of wealth creation in the long term. Depending on your risk appetite and investment goals, you should consider ELSS for your annual tax planning needs.

There is no formula of how to allocate money to active funds versus ETFs in your equity investment portfolios. In this article, we have discussed different considerations with regards to how you can plan your investments between ETFs and active funds. You can have both in your investment portfolio and they can complement one another. You should consult with your financial advisor and make informed decisions based on your specific needs.