Passive Investing – means some independent body creates an index and the fund management team just invests in that index without applying its mind. This means the whole investment process is bereft of human touch. Yes, it can actually be done by the machine – with just some low end operators.

When you talk to the fund managers in India they are likely to rubbish indexing and show you the historical data. Actually the historical data too is showing that on a TRI basis (total return index) most funds have struggled to beat the sensex or the nifty.

However, now there are many indices and it seems to be easy to beat only the main broad indices and not the smaller focused indices. There is more research – depth and time wise – from USA than from India. Our oldest index Sensex is just 34 years old – it started in 1984 – with data from 1979.

Indexing is now a force in USA -but still less than 20% of the funds are managed by the indexing aficionados! In fact Goldman Sachs and their equivalent have called indexing as worse than Marxism, parasitic investors, destroyer of the price discovery mechanism….etc. Even in India there is a feeling that there must be tremendous pressure to keep a share in the index – so you see the Mncs dropping out and Indian promoters pushing their companies into the index. Oops I mean huge attempts, and not always successful. BSE as an index provider also leaves a lot to be desired. In fact in India it is the exchanges who create the index, and that is not a good thing for us. I wish there is an independent Indian index – created by a company owned predominantly by Indians. No. I will not like a Crisil equity index. Remember Crisil is no longer an Indians owned company!

With less than 20% of the US funds under the index saying that indexing is impacting price discovery is ridiculous and it is just the defense of the incompetent fund managers of the USA. Also the market cap of the US markets held by the mutual funds is huge. Hence mutual funds is the market. Therefore indexing works.

In India mutual funds play a much smaller part. Life insurance, Nps, etc. are still large players. Life insurance companies do not do any indexing, but they have the index as a benchmark. NPS is a pure index play – but there is pressure on them to do active management. In fact one of the NPS managers invests all the money in Active managed funds. Not sure if he pays a management fee for the asset allocation. I am sure there is some kind of a fee that the unit holder is paying.

Even though the funds under management is increasing even in India, indexing is really a few years ago. Not much, but at least costs have to drop for index based investing in India. At 0.10 or 0.25 fees indexing will become a reality. Right now its not yet.

Our index structuring is also too wrong. So we will have to wait for a sensible index and a drop in costs…to justify indexing.

2021 perhaps?