Episode 2 - Are Index Funds Outperforming Actively Managed Funds?

Deepak Shenoy and Shray Chandra discuss the potential of "passive" investing.

Read full transcript: https://www.capitalmind.in/2019/02/podcast-episode-2-are-index-funds-outperforming-actively-managed-funds/ 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 Parting thoughts: - 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.