If you see the fund performance in India, most, if not all fund managers have schemes which beat the the sensex or the nifty. Have you wondered why it is easy to beat the indices in India but fund managers in the US find it very difficult to do so?

There are just too many people whom I know on a personal level who laugh even if they are benchmarked against the index.

Who are the people? and what do they do?

Well these are guys who invest in excess of US $ 1 million. Many of them have a clear idea of their investing portfolio, trading portfolio, and a quasi-trading-cum investing portfolio.

In the third category they will trade ONLY in good quality shares like Cummins, Biocon, Ultratech, L&T, Tata Motors – if things go wrong, these shares will be held for 3-4 years without too much of a worry.

The Indian indices are free float – market cap weighted – and thus dominated by big large companies. This is not such a bad idea if the markets are really free. However in India the biggest player in the equity market is also the guy who makes the rules. This is really sad. The equity markets are getting as bad as the debt markets.

Look at the big market cap companies – Ongc, Coal India, Sbi, Ntpc, the other oil Psus…..- not a very healthy scenario. These shares do not get a good price/earning ratio, and rightly so.

If you are a fund manager can you afford to IGNORE them? No. Your board, your trustees, the financial media will all rip you apart, and under duress you will have to include them. Also if you are to be compared to an index, you might as well invest as the index does.

Unless somebody creates a bench mark like “Sensex WITHOUT THE PSUs” as a benchmark, all the funds will buy the psu stocks. So the government is sure that fund managers have NO choice but to buy their stocks. Even if ALL the investor (forget one FII sitting in UK or US) scream, the government could not care.

The set of people mentioned above deal with the psu companies as a supplier and know that these organisations have no respect for the shareholder.

funny situation – going forward all of you will be able to beat the indices with the help of good fund managers…or in some cases even on your own, but the returns themselves in absolute terms MAY not attract you. So more Indians will stay out of the equity markets – may be sad, but it is true.