How to Build a Core Portfolio with Just 3 ETFs
TL;DR: You can build a well-diversified, low-cost, and easy-to-manage core investment portfolio using just three Exchange Traded Funds (ETFs). By selecting one equity ETF (like Nifty 50 or Sensex), one international equity ETF, and one debt ETF, you can achieve broad market exposure, reduce risk, and keep costs minimal. This strategy is ideal for beginners and long-term investors looking for a hands-off approach.
Why a 3-ETF Portfolio Makes Sense
I believe that simplicity is the ultimate sophistication in investing. A portfolio built with just three ETFs offers several advantages:
- Diversification: With just three funds, you can gain exposure to thousands of securities across different asset classes and geographies.
- Low Cost: ETFs typically have lower expense ratios compared to mutual funds, which means more of your money works for you.
- Ease of Management: With only three holdings, rebalancing and tracking your portfolio becomes straightforward.
- Transparency: ETFs disclose their holdings daily, so you always know what you own.
This approach is particularly suitable for Indian investors who want to avoid the complexity of picking individual stocks or managing dozens of funds.
The Three Essential ETF Categories
For a truly diversified core portfolio, I recommend including these three categories of ETFs:
1. Domestic Equity ETF
This forms the foundation of your portfolio. In the Indian context, this would typically be an ETF tracking the Nifty 50 or Sensex index. These indices represent the largest and most liquid companies in India, providing broad exposure to the Indian economy.
2. International Equity ETF
Adding global exposure helps diversify away from country-specific risks. This could be an ETF tracking developed markets (like US S&P 500 or MSCI World) or emerging markets excluding India.
3. Domestic Debt ETF
Fixed income provides stability to your portfolio and reduces overall volatility. Consider an ETF tracking Indian government securities or corporate bonds.
Step-by-Step Guide to Building Your 3-ETF Portfolio
Step 1: Determine Your Asset Allocation
Your allocation should reflect your risk tolerance, investment horizon, and financial goals. As a general guideline:
- Aggressive investors (younger, longer time horizon): 70% domestic equity, 20% international equity, 10% debt
- Moderate investors: 50% domestic equity, 30% international equity, 20% debt
- Conservative investors (near retirement): 30% domestic equity, 20% international equity, 50% debt
Step 2: Select Specific ETFs
Choose low-cost, liquid ETFs with significant assets under management (AUM). For Indian investors:
- Domestic Equity: ICICI Prudential Nifty ETF, HDFC Nifty 50 ETF, or SBI Nifty ETF
- International Equity: Motilal Oswal NASDAQ 100 ETF or similar global ETFs available in India
- Domestic Debt: Bharat Bond ETF or Nippon India ETF Nifty 1D Rate Liquid Bees
Step 3: Implement Your Strategy
Open a demat and trading account with a discount broker to minimize transaction costs. Purchase your chosen ETFs in the proportions determined in step 1.
Step 4: Set Up Regular Investments
Consider setting up a systematic investment plan (SIP) in these ETFs to benefit from rupee cost averaging and discipline.
Step 5: Rebalance Periodically
Review your portfolio every 6-12 months. If your allocations have drifted significantly from your target, rebalance by selling overweight assets and buying underweight ones.
Sample Portfolio Allocations
Here are three sample portfolios based on different risk profiles:
Aggressive Portfolio (Age 25-35, long-term growth focus)
- 60% Nifty 50 ETF
- 30% NASDAQ 100 ETF
- 10% Bharat Bond ETF
Moderate Portfolio (Age 35-50, balanced approach)
- 40% Nifty 50 ETF
- 30% International Equity ETF
- 30% Debt ETF
Conservative Portfolio (Age 50+, capital preservation focus)
- 30% Nifty 50 ETF
- 20% International Equity ETF
- 50% Debt ETF
Pros and Cons of a 3-ETF Portfolio
Advantages
- Simplicity: Easy to understand and manage
- Cost-effective: Lower expense ratios than most mutual funds
- Tax efficiency: ETFs typically generate fewer taxable events than actively managed funds
- Transparency: You know exactly what you own at all times
- Diversification: Broad market exposure with minimal holdings
Disadvantages
- Limited customization: You're limited to the index constituents
- No active management: You'll never outperform the market
- Tracking error: ETFs may not perfectly replicate their underlying index
- Liquidity concerns: Some niche ETFs may have low trading volumes
Common Mistakes to Avoid
I've seen investors make these errors when building ETF portfolios:
- Overlapping holdings: Ensure your ETFs don't hold the same securities
- Ignoring costs: Even small differences in expense ratios matter over time
- Market timing: Trying to guess market movements defeats the purpose of this strategy
- Neglecting rebalancing: Letting your portfolio drift can increase risk
- Chasing performance: Don't abandon your strategy based on short-term results
Case Study: Rohan's 3-ETF Portfolio Journey
Rohan, a 32-year-old software professional from Bangalore, started with ₹10 lakhs in January 2020. He allocated:
- 60% to Nippon India ETF Nifty BeES
- 30% to Motilal Oswal NASDAQ 100 ETF
- 10% to Bharat Bond ETF April 2023
Despite market volatility during COVID-19, his portfolio recovered strongly and achieved an annualized return of approximately 14% over three years. More importantly, he spent less than 2 hours per year managing his investments and paid minimal costs.
Comparison: 3-ETF Portfolio vs. Traditional Mutual Fund Portfolio
| Aspect | 3-ETF Portfolio | Traditional Mutual Fund Portfolio |
|---|---|---|
| Cost | Lower (0.1-0.5% expense ratio) | Higher (1-2% expense ratio) |
| Transparency | High (daily holdings disclosure) | Moderate (monthly/quarterly disclosure) |
| Control | You decide allocation | Fund manager decides allocation |
| Diversification | Broad market exposure | Can be more concentrated |
| Tax Efficiency | Generally higher | Generally lower |
| Active Management | None | Available in active funds |
ETF Investment Checklist
Before you invest, make sure you:
- Understand your risk tolerance and investment goals
- Research and select appropriate ETFs
- Open a demat and trading account
- Determine your asset allocation
- Set up automatic investments if possible
- Schedule periodic review dates
- Understand the tax implications
- Have an emergency fund separate from investments
Glossary of Key Terms
- ETF: Exchange Traded Fund – A basket of securities that trades on an exchange like a stock
- Expense Ratio: The annual fee charged by the fund to cover operational expenses
- Asset Allocation: The distribution of investments across various asset classes
- Rebalancing: The process of realigning portfolio weights back to target allocations
- Diversification: Spreading investments across various assets to reduce risk
- Liquidity: The ease with which an asset can be converted to cash
Frequently Asked Questions
Q: Can I really get proper diversification with just 3 ETFs?
A: Yes, if you choose broad market ETFs that cover different asset classes and geographies. A Nifty ETF alone provides exposure to 50 large Indian companies, while an international ETF adds global diversification.
Q: How often should I rebalance my 3-ETF portfolio?
A: Most investors rebalance annually or when allocations deviate by more than 5-10% from targets. Avoid frequent trading to minimize costs and taxes.
Q: Are ETFs better than index funds for this strategy?
A: Both work, but ETFs often have lower expense ratios and can be traded throughout the day. Index funds might be better for small SIPs due to no brokerage costs.
Q: What percentage of my portfolio should be in international ETFs?
A: Most financial advisors recommend 20-40% international exposure for Indian investors, depending on risk tolerance.
Q: Can I use this strategy for my retirement corpus?
A: Absolutely. A simple 3-ETF portfolio can be an excellent foundation for long-term wealth building, including retirement planning.
Q: How do taxes work for ETF investments in India?
A: Equity ETFs held for more than one year qualify for long-term capital gains tax of 10% on gains above ₹1 lakh. Debt ETFs have different tax treatment based on holding period.
Conclusion: Start Building Your Simplified Portfolio Today
Building a core portfolio with just three ETFs is one of the most effective ways to participate in market growth while minimizing complexity, costs, and time commitment. This strategy works particularly well for Indian investors who want a hands-off approach to wealth creation.
I encourage you to start with whatever amount you can comfortably invest—even ₹5,000 monthly through SIPs can grow significantly over time. The key is consistency, discipline, and staying the course through market cycles.
Ready to begin? Open a demat account today, select your three ETFs based on your risk profile, and take the first step toward simplified investing.
References
Step-by-Step Guide to Implementing Your 3-ETF Portfolio
- Assess Your Risk Profile: Determine your risk tolerance—conservative, moderate, or aggressive—to decide your allocation between equity and debt ETFs. For example, a moderate investor might choose 60% Nifty 50 ETF, 20% international ETF, and 20% debt ETF.
- Open a Demat and Trading Account: Select a broker with low brokerage fees and no hidden charges for ETF transactions. Many platforms in India offer zero brokerage on ETF investments^6.
- Select Your ETFs: Based on your risk assessment, pick one ETF from each category:
- Broad Market Equity: e.g., ICICI Prudential Nifty 50 ETF or HDFC Sensex ETF
- International Equity: e.g., Motilal Oswal NASDAQ 100 ETF or Mirae Asset Hang Seng TECH ETF
- Debt: e.g., Bharat Bond ETF or Nippon India ETF Nifty 1D Rate Liquid BeES
- Set Up SIPs or Lump Sum Investments: For discipline, automate monthly SIPs; for lump sums, consider dollar-cost averaging by investing portions over a few months to mitigate timing risk.
- Monitor and Rebalance Annually: Check your portfolio once a year. If allocations drift beyond your target (e.g., equity rises to 70% in a 60% target), sell overweight assets and buy underweight ones to revert to your original plan.
Pros and Cons of a 3-ETF Portfolio
Pros:
- Simplicity: Easy to manage with minimal time commitment—ideal for busy professionals.
- Diversification: Exposure to domestic equities, international markets, and fixed income reduces concentration risk^7.
- Cost-Efficiency: Lower expense ratios compared to actively managed funds; typically 0.05–0.50% for ETFs vs. 1–2% for mutual funds^8.
- Tax Benefits: Long-term equity holdings (over 1 year) enjoy favorable capital gains tax rates.
Cons:
- No Outperformance: You'll match market returns but never beat them, missing potential alpha from stock picking.
- Currency Risk: International ETFs expose you to forex fluctuations, which can erode returns if the rupee strengthens^9.
- Liquidity Constraints: Some niche ETFs may have low trading volumes, leading to wider bid-ask spreads and execution delays.
- Behavioral Challenges: During market downturns, sticking to the strategy requires emotional discipline to avoid panic selling.
Frequently Asked Questions (FAQs)
Q: How do I choose between different ETFs in the same category?
A: Compare expense ratios, tracking error (lower is better), assets under management (AUM), and liquidity. For example, among Nifty 50 ETFs, select one with the lowest cost and smallest tracking discrepancy^10.
Q: Can I include sectoral or thematic ETFs in this strategy?
A: I don't recommend it for the core portfolio. Sectoral ETFs add concentration risk. Keep them as satellite investments if you have higher risk appetite, but limit to 10–15% of total portfolio.
Q: What if one ETF underperforms consistently?
A: Unless there's a fundamental issue like high tracking error or liquidity crunch, stay invested. The strategy relies on long-term market growth, not short-term performance.
Q: How do I handle dividends from ETFs?
A: Most ETFs reinvest dividends automatically (growth option), but some offer payout options. For compounding, choose growth options to maximize returns.
Q: Is there an alternative if I cannot invest in international ETFs?
A: Yes, consider diversified equity mutual funds with international exposure or ETFs tracking indices like MSCI World, but be mindful of higher costs and tax implications.
Personal Reflection: Why I Stick to This Strategy
In my own investing journey, I've found that simplicity breeds consistency. By automating SIPs into just three ETFs, I've eliminated the noise of daily market movements and emotional decision-making. Over the years, this approach has not only saved me time but also compounded steadily, aligning with my long-term goals like retirement and children's education. It's a reminder that in investing, sometimes less truly is more.