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How to build a smart portfolio? Dhiraj Relli of HDFC Securities suggests
India's investment landscape is undergoing a significant transformation, driven by technological advancements, evolving investor preferences, and innovative financial products.
Among these, Exchange Traded Funds (ETFs) and Margin Trading Facility (MTF) are emerging as powerful tools that, when combined, offer a smarter, more flexible approach to portfolio construction. This synergy enables investors to navigate today's dynamic markets with efficiency, agility, and strategic precision.
Over the past five years, ETFs have transitioned from niche investment products to mainstream constituents of Indian portfolios. According to data from the Association of Mutual Funds in India (AMFI), as of June 2025, assets under management (AUM) in ETFs have soared to approximately Rs. 9.24 trillion, a fourfold increase from approximately Rs. 1.86 trillion in June 2020. This meteoric rise reflects a confluence of factors: the allure of low-cost passive investing, transparency, liquidity, and an increasing awareness of diversification benefits among retail and institutional investors alike.
Equity ETFs dominate the segment, with assets exceeding Rs. 7.4 trillion, capturing investor confidence in India's economic growth story. Debt ETFs have accumulated around Rs. 97,000 crore, appealing to risk-averse investors seeking stability.
Gold ETFs, serving as a safe haven amid global uncertainties, have crossed Rs. 64,000 crore in AUM. The expansion of thematic and smart beta ETFs—strategies that deviate from traditional market-cap weighting—has further enriched the investment landscape, catering to investors seeking tailored exposure aligned with specific themes or factors.
Retail participation has also seen robust growth, with retail AUM having tripled between March 2020 and March 2025, growing from Rs. 5,335 crore to over Rs. 17,800 crore, driven by digital platforms providing seamless access to a broad spectrum of ETF products.
Institutional investors have ramped up their ETF holdings as well, and this institutional endorsement underscores ETFs' credibility as a strategic component of long-term asset allocation.
Amplifying returns with Margin Trading Facility (MTF)
While ETFs provide a cost-effective and transparent avenue for diversification, MTF introduces an additional layer of strategic flexibility. By allowing investors to borrow funds to purchase securities, including ETFs, MTF enables leveraged investing. When used prudently, this approach can magnify gains, provided risk management principles are rigorously adhered to.
The combination of ETFs and MTF is particularly compelling because it facilitates broad market exposure with leverage, reducing the concentration risk associated with individual stocks.
For example, an optimistic investor with a positive outlook on India's growth trajectory might choose to buy units of a Nifty 50 ETF using MTF. This strategy offers instant diversification across 50 of India's leading companies and amplifies market exposure without requiring additional capital upfront.
The liquidity and real-time pricing of ETFs ensure that positions can be adjusted swiftly in response to market movements, while daily mark-to-market settlements provide transparency and control over leverage-related risks.
Data-driven growth
The momentum behind ETFs and MTF is evident. The share of ETFs within total mutual fund AUM has nearly doubled since 2020, now accounting for approximately 12.4 per cent of total mutual fund AUM. Industry forecasts project strong growth over the next several years, driven by regulatory support, fintech innovations, and rising investor education.
Smart beta and thematic ETFs are poised to become even more prominent as investors seek strategies aligned with specific risk profiles, ESG considerations, or thematic preferences. Advances in digital infrastructure will continue to democratize access to sophisticated tools like MTF, allowing both retail and high-net-worth investors to build more nuanced, resilient portfolios.
Building smarter portfolios
To leverage the combined potential of ETFs and MTF effectively, investors must adopt a disciplined and strategic approach. It begins with aligning leverage strategies with individual risk tolerance, investment horizon, and financial objectives. Selecting ETFs with high liquidity and low tracking error is essential to ensure efficient execution and minimised deviation from benchmark indices.
Moreover, understanding the interest costs associated with MTF is crucial, as these can impact net returns, especially over longer holding periods.
The integration of ETFs and MTF offers a compelling proposition: the ability to construct diversified, cost-efficient portfolios that are adaptable to market conditions. This approach not only enhances growth prospects but also fosters prudent risk management, enabling investors to navigate volatility with confidence.
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