Buy Index funds…
The number of people who advise investors to invest in Index funds is now increasing. Of course many of them are victims of the Great American media program.
As long as Prashant Jain, Naren Sankaran, Nagnath, Sukumar are managing funds for me for a 2% fee why should I ‘index’ my portfolio? There are many fund schemes in my portfolio that beat the index. There are many shares in my portfolio which beats the index by a mile.
It may make sense in the USA to index your portfolio – perhaps the index is far more indicative of the market and a Russell 5000 is available. In India the only 2 indices available are the Sensex and the Nifty. To me both are not great indices. The market cap and free float biases means good profitable companies can almost NEVER reach the index.
My Cummins, Coromandel Fertilisers, EID Parry, will never be in the index and ITC will be the biggest part of the FMCG index – and that is because it has a capital intensive business like hotels. Just creating a portfolio and staying out of Hpcl, Bpcl, IoC you could have beaten the index. If the govt. develops the guts and frees gas and petrol prices, then things could be different. However a sensex dominated by one owner to me is huge risk.
Since Indian indices have a major construction problem I am happy with my fund managers and my adviser who picks a far superior portfolio for a small fee.
So as long as the fund managers are beating the index stay in them. Once the index gets the better of the fund manager shift to Index funds.
Till then stick to the broad well diversified equity funds like Hdfc Equity, Templeton India Growth fund, Icici prudential Dynamic or Discovery fund….just to name a few.
KalpK
Dear Subruji,
Do index fund returns match with the normal index or the real returns index? Bees is a coulpe of precentages above the normal index, so could this be because of matching with real returns index?
I have been investing almost very regularly since 3 years, and so i calculated returns with normal index if i had done an SIP in Nifty Bees. Past 3 years the returns are very poor, but you always say, min. horizon of 5 years, So lets see. I have made a chart with a number of comparative returns that i would like to share with you once i get a few months data points. hoping you can give some constructive comments.
Regards,
subra
very scary if you use a blog / website as a substitute for a planner. ALL MY ADVICE IS generic. For specific details you need to go to a planner. Many India based mutual fund schemes HAVE BEATEN the index. So indexing does NOT MAKE SENSE FOR ME. ‘Indexing’ is an American concept..not yet important in India. Not sure when we will USE OUR OWN data to analyse instead of doing a cut n paste.
3,5,7 years makes no sense. This money should not be required for a long period of time (say 7 years). No guarantees even then. WB says ’80 years is too short to use data’. L O L.
KalpK
I am not using your blog as substitute for planner, i started reading just a few weeks ago. Actually i would like to handle my investments myself. I think i wasnt very clear, i havnt indexed, i hav invested in equities, but i compared my returns with the index, and is much better.
Manish
Subra
I agree with you , however i am confused with “Myth of Eternal Alfa and Predictibel alha” , which Dharmendra Rai talks about , what is wrong with that concept .
http://www.benchmarkfunds.com/Documents/Myth_of_Predictable_Alpha_30Mar2010.pdf
Your views on that ?
Manish
subra
I will not get into what is RIGHT or what is WRONG with Mr. Rai’s views. I have been a broker, done PMS, seen Hdfc amc, Templeton, Naren Sankaran (I Pru) – and have SEEN and felt the impact of ALPHA. Frankly I do not run a magazine, NOR do i sell so I can do what I want to do.
Using statistics (and picking up ALL fund managers is HEIGHT of cruelty on investor’s intelligence). No way how I will pick up some fund managers – who suck. To me fund manager integrity, reasonable skill, and fund manager continuity are important. Have stuck to Prima through out its out and under-performance. Temp India Growth fund – THE MOST DISCIPLINED FUND in India, Discovery, Dynamic, – are all super aplha creators.
I have also invested in Benchmark’s Cnx 500, but my personal portfolio is doing far, far better. So not in a hurry to convert.
Will convert in about 8-10 years – when senility may set in 🙂
KalpK
On Mr. manish’s post: How come they considered 3 years data only, If they are doing ‘three year rolling return basis over the past two years’?
And secondly, the analysis is by Benchmark, who i think do only index funds 😉
Abhishek Gupta
Hi Subra,
The link has all the quotes used by the Marketing Team of Benchmarck Mutual Fund…:-P
Also attended a seminar on Indexing by the ONLY TRAINER IN THE WORLD ON INDEXING….Thats what his visiting card said..
Heard the names like Charles Shwab, John Bogle, Miller at this place. I am not a great fan of indexing but if the above including Warren Buffett say things u cant really cant disagree..
I am a big fan of NIFTY JUNIOR INDEX FUND by ICICI PRUDENTIAL.. Thats the only index fund (not etf) that follows the nifty junior, that outperforms the Nifty..
Ranjan
My 2 cents: For a absolute beginner who doesn’t read your blog, understands the abc of mutual funds and “invests” in a life insurance policy, Index is my recommendation. Believe me, there are crores of people like that!
Ofcourse for those who have chanced upon your blog and have read your specific recommendations, they can invest in the funds that you mention. But you mention less than 10 schemes whereas there are atleast 750 schemes.
Personal Finance is “personal”.
subra
Ranjan, my revenue model is NOT dependant on fund advertising, but on fund performance. Will stick to 2 fund houses and 1 fund manager. Will index after i turn senile or when they are under-performing. I know a 86 year old and a few people in their 70s who are still able to handle their portfolios…I do not trust myself.
Will index (perhaps) at about 60. Not sure. :).
Choosing which index fund to invest is also a full time business in USA. L O L. I personally thing the Russell 7000 is the best, but as always there are others who think differently.
In Indian conditions we need to wait for VANGUARD and volumes to drop prices. Indian index funds are available at 1.5 and Hdfc Top 200 is available at 1.86 – GAP is too low, and performance too superior.
An Indian Index fund (no not an etf) @ 0.3% is what I am looking at…still waiting.
Dr Mohammed Ali Khan
What about Benchmark S & N Nifty 500.. Of course fund managemant charges are high.. 1.5 % .. But is it not a broad based index?
Sunil Date
I asked the Index fund proponents this question. “An index i.e companies comprising the index’ is decided by a group of experts by their research. likewise MF also have their own experts and their research team. How can we conclude that one set of experts is better than the other for all times to come ?” I am yet to get a satisfactory reply.
I refered the perforamce of index funds vis a vis MF from a prominent MF magazine. About 22 MFs, which are more than 10 years old, have given CAGR superior to 20% with one of them at 31% CAGR.
No doubt, in the long run, by the convergence principle, the returns of all funds will converge to that of the market + or – few bps. But what about the shorter term ?
Sanjeev Bhatia
Hi Subra,
This post addresses a very important issue. Many a times people just advice without looking at harcore data. I have been interested in Indexing for quite some time but a hard look at cold facts stated someting other. As you have pointed out, many of the funds have beaten index by quite wide margin. I analysed my portfolio at the time of Jan 2008 crash also and then regulalry afterwards but still found ALL but one of them beating index consistently. Confused, I have just a starter position in Nifty BEES and Junior BEES but the core remains of direct equity and mutual funds. Also, many a times have found TOOOOO MUCH tracking error between index and actual fund performance (UTI takes the cake with 12%, yes-that’s true, difference between nifty and fund performance some time ago.
@ Manish, remember we had this discussion on linekdin too? I feel it is wrong to club ALL the fund managers collectively and then torture the data till it says what you want it to say. If we have about 250 equity diversified funds, you are bound to have pockest of over and underperformance. So the average in any case is going to be the Index return only. Why you can’t consistently be in top perfroming funds beats me. What Mr. Rai says is somewhat akin to clubbing all the students of a class, all toppers as well as failures, together and then highlight mediocrity. and if you remember, he has not been able to provide any concrete data regarding underperformance of MF as yet.
@ Abhishek,
I know it is not prudent to ignore Warren Buffet’s advice. But it is the context that matters. What he had said was in different context for the common man in much more developed markets. As they say, proof of pudding lies in eating, the data here says something else. Further, whole of indexing concept is based on so called phenomenon of EFFICIENT MARKET THEORY. Wasn’t it the same old Warren Buffet who had said “Had the markets been efficient, I would have on the street with a begging bowl”?
Bottomline? I will happily continue with my MFs and Equity portfolio till the ACTUAL DATA says something else.
I rest my case…..LOL
subra
A classmate of mine married a girl reporting to him. There were 3 people reporting to him at that stage. One of his juniors told me “Your friend marries 33% of the people reporting to him and 50% of our department is gone on a honeymoon”. Obviously statistics is good to report, but you need to understand how it is arrived at.
Nifty and Sensex have a HUGE construction problem. About that i will do a diff post. Churning data to say what you want it to say is quite simple.
I was on the podium with E A Sundaram (ex Hdfc Amc), Naren Sankaran (I Pru) and Arup Maheshwari. Here the manager from Benchmark was saying how in the past 3 years….the usual stuff.
Anup turned to him and said take a rolling return over 10 years, and all of us are from fund houses which have a better track record..AND IT IS true.
I agree with many others..will be in Franklin, Hdfc and Naren’s schemes TILL they underperform the sensex for 3-4 quarters sequentially. Till then, goodbye indexing. Sorry Mr. Dharmendra Rai, I like the 1.81 guys more than the 1.5 guys. Yes if index funds are available at .0009 may consider indexing or NPS is better :). Vanguard, WAITING FOR YOU 🙂
subra
Warren Buffet’s advice is difficult to even understand. He says derivatives are bad, but runs the world’s biggest re-insurance business. He says fund management charges are too high but charges 25% of the profits as fees (not disputing that he deserves it).
He says diversification ensures mediocricity, but runs an insurance business. The essence of insurance is diversification :). He says Goldman Sachs is a great firm, as is S&P – but he has to be SUMMONED to defend them in the court. He says S&P has done no wrong, but has been selling.
REMEMBER HE IS THE CEO of a very big successful company and owes a duty to HIS SHAREHOLDERS. Not to you and me. Sad but true.
It is time to stop reading everything he says unless you can interpret it fully. I cannot.
Neha
my name is Neha
charbucks
First of all great blog. I have recently started following this blog and absolutely love it.
I do regular SIP in both index fund and MF and here is my view on the topic. I agree on both counts
1. The index are heavily in favour of few companies and a good fund manager has scope to beat the index and we see ones like hdfc equity regularly doing it.
2. The differential in fees are totally worth since the returns are much higher.
But I have a different concern. And that is an AMC house scam.
I mean nobody saw Satyam downfall coming. Ramalingam Raju was even given few awards for his governance just couple years before that. So much for transparency. One of the best fund house HDFC (IMHO)had to settle with SEBI for insider trading. (You posted about it).
In such a scenario if I am going to put 60% of my retirement in equities is it worth the risk to go with a fund house. Or is it better to be happy with a 17-18% long term return in index etf and have the peace that you have no chance to be scammed? If I was putting 5% of my savings I would definitely go with the MF, but here we are talking about 50-70% savings, whats wrong with going with an index fund.
Appreciate your opinion.
charbucks
First of all great blog. I have recently started following this blog and absolutely love it.
I do regular SIP in both index fund and MF and here is my view on the topic. I agree on both counts
1. The index are heavily in favour of few companies and a good fund manager has scope to beat the index and we see ones like hdfc equity regularly doing it.
2. The differential in fees are totally worth since the returns are much higher.
But I have a different concern. And that is an AMC house scam.
I mean nobody saw Satyam downfall coming. Ramalingam Raju was even given few awards for his governance just couple years before that. So much for transparency. One of the best fund house HDFC (IMHO)had to settle with SEBI for insider trading. (You posted about it).
In such a scenario if I am going to put 60% of my retirement in equities is it worth the risk to go with a fund house. Or is it better to be happy with a 17-18% long term return in index etf and have the peace that you have no chance to be scammed? If I was putting 5% of my savings I would definitely go with the MF, but here we are talking about 50-70% savings, whats wrong with going with an index fund.
Appreciate your opinion.