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Feb 23, 2019

Episode 2 - Are Index Funds Outperforming Actively Managed Funds?

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
 
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.