Investing in Index funds
A blend of active and passive investing approach works in India?
Accessing overseas markets for risk diversification
In my last piece on brief analysis on US stock investing from India, I had made a case that cost of investments matters a lot for a discerning Indian investor. However, international diversification with the Index Funds and Mutual Funds could still be an option. The MF route where you can buy units of Fund of Funds/Exchange Traded Funds is more convenient compared to direct stock investing . That said, Sebi has recently restricted overseas investments by MFs!
Do check out Varsity module to know more about Index funds and ETFs :
A case for a blended model of both passive and active investment
As the debate of active fund management vs Index investing debate continues globally, its important to factor the differences and nuances between US and India markets. I had earlier written a piece on Vanguard moment - Reimaging MF industry with passive Investing when funds like Navi hit the market recently in India. These are newer avenues and relatively cheaper way to access US markets from India. Sticking to this “passive” investing style to access US markets may well work for Indian investors as majority of Index funds in the US underperform the benchmark index!
The situation in India is quite different, factoring the efficiency and market size and other factors, active fund management like mutual funds can still generate a significant Alpha. Hence a combination of passive (for US Index Funds) and active strategies (for India MF + direct exposure to individual India based equities) may work better for Indian investors.
By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals.” — Warren Buffett
What works in US may or may not work in India
Warren Buffet may be a great proponent of Index funds in US, a similar approach of investing solely in low-cost index funds may not work for India retail investors (see above table) CAGR returns from a hypothetical all market index fund of India may range from 11% to 16% in the given period above . In the long run may seem like decent returns but we would still have opportunities to generate more alpha ( get better returns than index funds)
A similar tale on the Exchange Traded Funds (ETF) front as well (see above table) if one thinks a blind SIP into ETFs will give you handsome returns in India, you are wrong! The annualized returns are at around 4% in India and around 15% in the US. Another classic example of guru mantra that works in US and not in India.
Direct Indexing can wait in India
Another newer chatter is on Personalized index portfolios aka direct indexing is now becoming mainstream in the US. It is now being discussed in India as well. Does it work in India?
What is Direct Indexing?
Direct indexing is an approach to index investing that involves buying the individual stocks that make up an index, in the same weights as the index. This is in contrast to buying an index mutual fund or index exchange-traded fund (index ETF) that tracks the index. Schwab just officially announced the upcoming launch of their Personalized Indexing platform. Minimum investment will be $100k
Again, India and US are different markets. Spreads are wider here and we still lack necessary tools to manage customized index portfolios for each investor (involves a lot of overheads in terms corporate actions tracking, reporting, pricing etc ) The Schwabs, Fidelitys, TDs in US are ahead of the game on this. Indian markets are not yet deep enough at this point in time for these products. Indians can definitely wait till direct indexing matures in India markets. Till then, it’s a good approach to blend both active investment and passive investments for portfolio of domestic and international exposure.
"Learn every day, but especially from the experiences of others. It’s cheaper." John Bogle
Disclaimer : This is not investment advice. Please consult SEBI recognized RIA.