We had a good response to our first episode: (Episode 1: On Debt Funds Losing Money). Today we bring you Episode 2.
It’s about a topic that’s interesting for us as active participants: Are Index Funds outperforming Actively Managed Funds?
Listen in, click the play button below.
Deepak Shenoy and Shray Chandra discuss the potential of “passive” investing.
1) Index Funds starting to hold their own?
– Index like products more popular in markets like the US
– Slowly coming of age in India
– Actively managed large cap mutual funds
– Want exposure to top 100 stocks, put 50% of funds in say nifty 50 and 50% of funds in nifty next 50
– Are actively managed large cap funds beating this combination?
– Combination of Nifty50 and Nifty Next 50 has beaten large cap funds on 3,5 and 10 year period!
– 2-3% p.a underperformance over the past few years
2) Are fees responsible for mutual fund underperformance
– Index are in a loose sense momentum type products
– 80-85% of MF money goes into large caps and large cap oriented funds
– SEBI regulations on limiting the universe of stocks per mutual fund does make outperformance more difficult
– Fees do play a part but they’re not the whole picture
– Index management through derivates and algorithms
– Nifty Next 50 has fallen considerably more than the Nifty
– SBI Nifty ETF gets significant monthly inflows from EPFO
– Information arbitrage on these large cap names isn’t what it used to be (this is a good thing)
3) What does this mean for customers?
– There can be a point at which passive investing leads to problems but we’re nowhere near that
– Bank of Japan ETF purchases are an example where corporate governance issues don’t necessarily bring down a stock
– Index investing means Less decision fatigue for customers
– Can spend less than an hour a year to see if index funds are winning out
– They are 100+ index type funds too. So there’s scope for innovation and marketing in indexes.
– Indexing is here. It’s worth considering.
– If you have a demat account, the SBI Nifty 50 ETF is the big index product out there.
We’ll have a more detailed post with data and charts soon!
We’d love to hear your thoughts! Ping us @deepakshenoy on twitter.