India is one of the last bastions of the actively managed fund managers. We do not have ANY website dedicated to Index based investing, and we seriously do not have champions. Of course things could be changing with Blackrock trying to play a big role in the Indian fund management industry. Others could follow suit…

Of course we need fund management costs of Index funds to drop dramatically. When you have champions who get a salary of US $ 4 Million for the active management is it surprising that NOBODY wants to give you REAL DATA about active vs passive?

Then there is such a huge creation of large cap, flexicap, mid-cap, micro cap, small cap, hybrid, …that there can hardly be an investor who does not have a complicated portfolio. Also the Indian index construction sucks. Also too much of psu shares in the index makes it easier for the Fund manager to beat the index.

One more argument for the active fund manager is “we will show our value during a recession” i.e. we will beat the index during a bear market. I seriously doubt whether the alpha will be justified – 1% alpha may not be worth the FM risk in your portfolio.

In the USA one bear market is likely to push more money from the active fm to the index. Look at our own mutual funds. The costs to be charged was fixed in the mid 1990s. At that time the funds were of the size of say 700 crores – I think that was the biggest. So it made sense to charge everything as a %age of the aum. Today when Hdfc Prudence is 38000 crores does it make sense to allow them say 1% asset management charges and 1% for expenses. Surely you do not need 380 crores to run a single scheme right?

Sebi has not done enough for the investor. Yes it has hurt the distributor at the bottom of the pyramid while pandering to the big asset management companies.

What can SEBI do?

For starters they can make “passporting” easy for all of us. If a foreign fund is allowed to sell its schemes in India – for starters the index fund without difficult conditions, there would be some competition. Lets face it – only when Citibank, StanC, Hdfc, Hsbc – all foreign owned banks – started giving good service did the psu banks feel the heat. I will do a full article on ‘passporting’ but that is essential.

When a foreign fund house wants to operate in India the restrictions should be far lesser. More on this later.

A recession or a 2 year bear market can mean some of these SIP can stop..and then the people will not come back so easily to the active management, they might choose index funds even in India.

When you see the commissions (for the real big distributors, aka banks and other aggregators) you will appreciate what I am saying. Go to the SEBI website and seek this info. It might be easier through an RTI than by searching on the site 🙂