Recipes For Simple, Effective Passive Equity Portfolios

Over a number of my previous articles I have discussed the benefits of passive equity portfolios. I have also spoken about ideal product options to build such portfolios. But I have never really touched upon how these various options actually go together in a portfolio. I will therefore touch upon this today. Passive equity portfolios are usually considered to be ideal for young earners and new investors.

But they are actually suited to anyone looking for a simple, low maintenance approach to portfolio management. It is perfectly plausible to have an equity portfolio having just a single index fund. A combination of multiple index funds would also work. To my common sense a combination of not more than 2 passive funds would be ideal. This reduces complexity and the degree of effort required to manage the portfolio. Let us now look at the various options investors can consider.

A. Single Fund Portfolios

Sensex Or Nifty 50 Index Fund

This is the simplest, most effective option. It is ideal for young earners and first time investors in equity mutual funds. Sensex and Nifty 50 index funds are equally viable options in terms of structure. But a Nifty 50 index fund offers broader exposure. The 50 companies in the Nifty 50 index represent 54% of India’s stock markets in terms of market capitalisation. The same figure for the Sensex index is 15-20%. These figures are taken as of late 2025. A detailed comparison of these indices is laid out in the graphic below.

The 20 year annualised rolling return of the Sensex and Nifty 50 are around 11-12%. This equates to an expected long term post tax return of roughly 9-10%. This is enough to give us a reasonable chance of achieving our goals comfortably. A portfolio comprising of a single Sensex or Nifty 50 index fund is therefore not meant for everyone.

It is best suited to investors who focus on achieving their goals above all else. This requires a lot of clarity and maturity on the investor's part. Those looking for higher returns or broader market exposure should refrain from opting for this approach. Also investors would be better off holding traditional Sensex or Nifty 50 index funds rather than the corresponding ETFs.

Nifty 100 Index Fund

Ideal for those who wish to stay within the large cap universe but go beyond the apex large cap indices (Sensex and Nifty 50). As of September 2025 the Nifty 100 represents 65% of India’s stock markets on a free float market capitalisation basis. Nifty 50 stocks account for 80-85% of the weightage of Nifty 100. Nifty Next 50 stocks account for the remaining 15-20%. This means the Nifty 100 is essentially the Nifty 50 with a slight flavour of the Nifty Next 50. The top constituents of the Nifty Next 50 as of February 2026 are laid out below.

The average 10 year rolling returns of the Nifty 50 and Nifty 100 since the year 2000 are around 11-13%. Maximum rolling returns for both indices during this period roughly come up to between 15% and 18%. The Nifty 100 has been shown to beat the Nifty 50 during selected 10 year periods since 2000. But this comes at the cost of significantly higher volatility and drawdowns. This tradeoff is something that each investor has to consider for themselves. To my common sense if large cap exposure is what the investor wants, it is best to stick to the Nifty 50 or Sensex.

Nifty LargeMidCap 250 Index Fund OR Nifty 500 Index Fund

Either of these is ideal for those looking for equity exposure across market segments. The Nifty LargeMidCap 250 offers exposure to the large and mid cap segments of the markets. It combines the Nifty 100 and Nifty Midcap 150 for broad market representation. It represents roughly 32% of India’s free float market capitalisation.

The Nifty 500 is a broad market index offered by National Stock Exchange (NSE). It combines the Nifty 100, Nifty Midcap 150 and Nifty Smallcap 250. This means it offers exposure across large, mid and small cap segments. It represents approximately 92% of India’s free float market capitalisation. It therefore offers comprehensive coverage of the Indian stock markets.

The average 10 year rolling returns of the Nifty LargeMidCap 250 and Nifty 500 are 13.8% and 12.8% respectively. Maximum 10 year rolling returns for both indices fall in the range of 15-16%. This indicates that these indices offer a reasonable chance of beating the apex large cap indices. This is mainly due to the broad market exposure they offer.

But both these indices carry the risk of significant impact costs. Impact cost refers to significant differences between buying and selling prices when large volumes of stocks are transacted. It is common in stocks and market segments that are thinly traded. Impact costs remain low in the case of large cap stocks. But they are significantly higher for mid and small cap stocks. This is one of the things that makes them highly volatile.

Assume a situation where the AUM of a Nifty LargeMidCap 250 or Nifty 500 index fund grows significantly. This means that the fund manager would have to buy large quantities of mid and small cap stocks. This would lead to a spike in impact costs. And that in turn would increase the tracking error of these funds. Impact cost may also increase during times of market turmoil. Investors dump large quantities of mid and small cap stocks under such conditions. This would again heighten tracking error in the case of Nifty LargeMidCap 250 and Nifty 500 index funds.

Those who wish to invest in these funds must take cognisance of these risks before investing. Let us now look at passive portfolios that can be built using a blend of 2 index funds.

B. Blended Passive Portfolios

The ideal way to build a blended passive portfolio would be to combine Nifty 50 and Nifty Next 50 index funds. Nifty Next 50 would serve as an effective proxy for mid and small cap exposure in the portfolio. Investors may calibrate exposure to the Nifty Next 50 based on their appetite for risk. To my common sense, there are two viable ways to blend these funds.

80% Nifty 50 And 20% Nifty Next 50

At first glance such a blend may seem identical to the composition of the Nifty 100 index. But this is not entirely true. The Nifty 100 is a market cap weighted index. Therefore larger stocks within the Nifty 50 would dominate its composition. An 80-20 blend between Nifty 50 and Nifty Next 50 would require fixed proportions to be maintained. It would be required regardless of market movements.

This could lead to a divergence in performance, especially when the Nifty Next 50 outperforms. The 10 year rolling return for the Nifty 50 comes up to roughly 14%. The corresponding figure for the Nifty Next 50 is roughly 14.5%. This pegs the expected return from a portfolio with an 80-20 split between the two indices at 14.1% [(14×0.8)+(14.5×0.2)].

50% Nifty 50 And 50% Nifty Next 50

Such a blend between the two indices would be ideal for investors looking for a better risk adjusted return. It offers better broad market exposure. But it would leave investors exposed to the risk of greater volatility and steeper portfolio drawdowns. The expected long term return from a portfolio with a 50-50 blend between the two indices would be 14.25 [(14×0.5)+(14.5×0.5)]. All other parameters would remain the same as those discussed for the 80-20 blend.

Final Thoughts

Each of the variants discussed above represent viable options for investors. Each variant has its own pros and cons. Investors may pick either of these variants based on their requirements and awareness of risk. Also none of the variants discussed above are better than the others. Investors must therefore not look for a so called superior choice among these. They must also not claim that the variant they have chosen is the best. Investors only need to ensure that they choose a variant for plausible reasons. They must also be fully aware of the implications of their chosen variant.