Episode 2 - Are Index Funds Outperforming Actively Managed Funds?

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.