To all alpha chasers – “Don’t risk what you have and what you need for what you don’t have and don’t need.”
I am sure you have been in a situation on the road, when you see vehicles in the other lane moving faster, manoeuvre yourself to get there, only to realise that the lane you just left is speeding away. “What a fool!”
Something similar is happening to the investor in the stock markets, direct or through equity mutual funds.
For a long time, the investor was spending time and effort in looking for the best of the fund managers delivering the highest returns. This search was made as if it was no less than the search for elixir of life.
Unfortunately, that search seems to be turning sour now, forcing investors to think if these actively managed specialist fund managers can really deliver the goods. Is alpha really possible?
Should the money be moved to index funds?
At the end of 2018, given the way markets were, several investors wondered if they were better off with passively managed equity index funds / exchange traded funds (ETFs).
“Of course, there is a recency bias working here. Many of these investors are new having made their entry in the last couple of years. But they are shaken up with the sharp gap between what the market has delivered and what the actively managed fund has.” I wrote then.
“I am not really sure if this is just recency bias or the wind has really turned. “
“It was the recency bias. Look at the comparisons now and you will know.”
That only makes things worse for the lay investor.
Should I chase that alpha with the active fund?
However, I have another question to ask.
Do you need that alpha?
What if I ask you to assess and find out how much return do you really need? No, don’t say maximum, highest, best returns.
Spare me the superlatives!
What if you take a different approach and ask how much is enough?
How much do you need to meet your goals, to live a good life, to take care of needs and some wants of your family?
I have come across several investors who can just do with market returns. While it is good to have a better return, they don’t need that alpha.
If you too are an investor of sufficient means, adequate asset base and are saving enough on a regular basis, should you be bothered about beating the market at all?
Why make all the effort in looking for alpha fund managers, comparing various funds, their portfolios, paying extra management fees and other taxes. Is it worth the while?
Probably, that’s where index investing makes sense.
One of the most advertised benefits of index funds is that they are simple, low cost and just about deliver the goods, that is, close to market returns.
No worry about changing funds because of fund managers’ lukewarm performance or paying high costs in the hope to get a pot of gold at the end of the rainbow (read superior returns), waiting for you.
Those in favour of active investing will come out with the arguments about portfolio quality and risk management.
To which the passive investor can simply say, “Portfolio be damned.”
Who needs a fund manager designed portfolio which falls as much as the market and sometimes fails to match up when the market is on the ascent?
With a Nifty or Sensex based index funds / ETFs, you get an exposure to some of the largest and most liquid companies traded on the exchanges. Even if there are a few bad apples, that’s fine.
There is no special knowledge and rare, if it is, that can outdo the collectively functioning brain of the market.
As a summary, the questions are –
- Is alpha possible?
- At what risk?
- What cost?
It then moves further to –
Why not just invest in passive index funds? Aren’t market returns sufficient?
Remember the famous saying: “Don’t risk what you have and what you need for what you don’t have and don’t need.”
Stick to your lane and you will reach your destination, give or take a few minutes.
What do you think?
Yet another approach
…could be dividing the portfolio between core and tactical. A large part of the portfolio should be structured to deliver market returns with passive strategies.
However, if you are the adventurous kinds, the tactical portion can be used to chase some of the opportunities in the active space or any other structures that may deliver higher returns.
I have been working on the same for some time. If you are looking at core and tactical MF portfolios – here’s something you would want to look at.
As always, do share your feedback and comments.
There are several books that expound this view. Richard Ferri’s “All about asset allocation” and Tony Robbins’s “Money: Master the Game” are just 2 to start with.
Certainly. As you say, there are many others coming around to this point of view. Thanks.
Forgot to add – these books are USA centric, but the thought process applies.
What are you trying to say? it would be useful to have a conclusion para.
That passive investing can well suit someone with modest expectations, not running for alpha and thus avoiding many mistakes.
Its time to switch over to Index funds. Initially Large cap funds are struggling beat index after SEBI categorization . In future may be mid and small cap also join the queue. If we have moderate expectations then Indexing is the way to go.
Advantages of Indexing :
No peer comparison
No worries if FM quit
No index beating worries.
No Downside protection
No beating of Index like Active funds.
I see that we have a convert in the house 🙂
change is inevitable . First i started investment with Regular funds.
Data point shows that Direct plans are the best. So i convert to Direct.
Now again, i am thinking why not convert from Active funds to Indexing 🙂
Thank you. In the Index universe, what will be the best to get a decent returns? Mix of N50+NN50 ? or anything to more to add to get a multicap’ ish returns?
N50+NN50 is a large cap exposure. You can simply go for an N100. There are many other smart beta index funds there or coming up too.
Is there any “Non ETF” N100 funds available? How do I invest in N100 index?
I am currently doing N50+NN50 50:50… Direct Index funds.
There isn’t. The closest are those which use N100 but put equal wieight to the holdings.
N50+ NN50 along with that you can add active midcap fund. Because there is no Midcap index funds available.
A lot of people stand to lose if majority retail chooses index investing. The only person to gain is the investor.
Currently seeing all bloggers and influencers singing praises about indexing, just a year back they were a stern opposers. Its totally understandable they can’t risk their credibility and look silly with the changing times by sticking on the same lines beaten lines “India is not an efficient market” “indexing works in US, not here”
Guess what when the majority choose to index, what is there to write about or educate, bloggers and influencers will have a tough time to not write anything.
They have to change their ways from the same old “which fund is the best fund for XXX year”.
They should focus on addressing asset allocation, goal-based planning primarily for retirement than this menial task of fund/fund manager selection which has lost relevance in the coming times.
You may choose not to publish this comment if it attacking in any regard.
No reason why this comment shouldn’t appear. You show us the mirror 🙂
Excellent article Vipin. I’ve been into index investing for more than 4 years now and can certainly vouch for the benefits. It saves you from a lot of stress about portfolio performance besides giving an opportunity to become your own fund manager. The larger question to be answered, however, is your goal and the passage you want to take to reach there.
Keep up the good work.
We can rely on your word Vipin. Good to see you around.