[whitewing]

Originally Posted by carboy

Considering how many debt schemes have not been able to preserve capital, I would recommend only funds which invest solely in Government debt. I would even prefer RBI Bonds (7%) or NSC/KVP over Debt funds in the lower tax brackets.

Wouldn't the tax free bonds also fall in the same "risk" category as Govt debt? Given that it is issued by these large PSUs?


I have been under the impression that the Govt would have to step in of say, HUDCO/REC folded. Is this not the case?

[SmartCat]

Originally Posted by whitewing

Wouldn't the tax free bonds also fall in the same "risk" category as Govt debt? Given that it is issued by these large PSUs?
I have been under the impression that the Govt would have to step in of say, HUDCO/REC folded. Is this not the case?

Risk level of PSU debt instruments are a notch higher than Govt bonds. PSU companies can undergo a 'technical' default, because of cash flow problems. Eventually, these companies are likely to pay back the bond holders though.

Risk averse investors should invest in these three types of debt funds:

1) For long term investment (say 5 years), choose gilt funds (also called government securities fund). Here, do NOT invest in funds that have "constant maturity" or "constant duration" in their names. Just remember that NAV of gilt funds can fall just like an equity fund.
2) For medium term investment (say 3 years), choose Banking & PSU Debt funds. NAV might fall, but not at the pace of gilt funds.
3) For short term investment (up to 1 yr), choose overnight funds. NAV will not fall and accrue interest everyday.

Over the past 10 years:

1) Gilt funds have generated 8.5% CAGR returns
2) Banking & PSU debt funds have generated 8.5% CAGR returns
3) Overnight funds have generated 7.07% CAGR returns

https://www.valueresearchonline.com/...fund-category/
Click on category name to get a list of funds to invest in.

[DigitalOne]

Originally Posted by SmartCat

Risk level of PSU debt instruments are a notch higher than Govt bonds. PSU companies can undergo a 'technical' default, because of cash flow problems. Eventually, these companies are likely to pay back the bond holders though.

There is another risk. PSU funds also invest in debt papers issued by state level PSUs/Electricity boards/Municipal bonds. Some of them are not as risk-free as the big central govt PSUs. There could be delays in pay-outs from these issuers.

[Simhi]

Originally Posted by SmartCat

3) For short term investment (up to 1 yr), choose overnight funds. NAV will not fall and accrue interest everyday.

May I know what are your thoughts of investing in Liquid funds instead of overnight funds. Over a period of 1 year, are Liquid funds likely to lose NAV or give negative returns?

[ValarMorghulis]

How about Gold ETFs; are they a good investment? I understand Gold is at an all time high now, but how good are these ETFs?
I am in mutual funds and equity market already and was thinking of venturing in this. Any pointers would be appreciated. Thanks

[SmartCat]

Originally Posted by Simhi

May I know what are your thoughts of investing in Liquid funds instead of overnight funds. Over a period of 1 year, are Liquid funds likely to lose NAV or give negative returns?

In the past 12 months, liquid funds have seen credit defaults. So liquid funds are riskier than Overnight funds.

But if you do a little bit of homework, you can invest in liquid funds and get the extra 0.5% returns per year:

- Invest in large well known fund houses
- Check the size of liquid fund assets. It should be atleast Rs. 10,000 cr.
- Check the portfolio of liquid fund. There should be alteast 100 securities
- Look for unknown securities in the portfolio. If there are too many such names, avoid the fund.

All this data is available at valueresearchonline.com

If you don't want to do all this, you could just invest in Overnight funds instead.

[digitalnirvana]

There's a line of thought amongst some YouTube influencers / teachers that MF fund managers charge too much for what they return and its better instead to just buy Nifty Index funds or stocks of companies which make up the Nifty.

What do you think @smartcat and other gurus? Is there any merit in this line of thought?

https://youtu.be/f1UZTNVtsQg

[SmartCat]

Originally Posted by digitalnirvana

There's a line of thought amongst some YouTube influencers / teachers that MF fund managers charge too much for what they return and its better instead to just buy Nifty Index funds or stocks of companies which make up the Nifty. What do you think @smartcat and other gurus? Is there any merit in this line of thought?

Absolutely no merit.

This line of thought becomes popular when NIFTY starts outperforming other stocks. But when the reverse happens (and I can assure you that it will), they will start pushing actively managed funds.

In US, Vanguard popularized index fund investing, and now most American investors have majority of their investments in S&P 500 stocks, in the same weightage. This will end very badly, because there are significant flaws in the way indexes are constructed.

[carboy]

Originally Posted by SmartCat

In US, Vanguard popularized index fund investing, and now most American investors have majority of their investments in S&P 500 stocks, in the same weightage. This will end very badly, because there are significant flaws in the way indexes are constructed.

Historically, index funds have outperformed a huge majority of managed funds for decades in the USA. So over the long term, your odds of doing better with managed funds depend on your low odds of picking the small amount actively managed funds which do beat the index.

[ashokrajagopal]

Originally Posted by carboy

Historically, index funds have outperformed a huge majority of managed funds for decades in the USA. So over the long term, your odds of doing better with managed funds depend on your low odds of picking the small amount actively managed funds which do beat the index.

See, the passive investing makes sense only when a small percentage of people are doing it. By definition, passive means you are not making a dent in the whole market pricing equation as opposed to active investing where you pick a theme.
More passive investors means more money flows on to the indexes which are created, which is essentially actively steering cash flow into these specific stocks. Before they release new ETFs they actually do a lengthy analysis so the index looks good and promising. Once it is released, the cash flow automatically reinforces this and that sort of shapes the prices to go only in one direction.

It would reach a point where more inflow means they buy more stocks, and more outflow means they sell. In the event of a downturn in the market, there would certainly be a chain reaction of more outflow and that can drive to all kinds of panic. Also must add the fixed inflow like Pension plans etc that are going into these indexes -- what happens when/if these flows stop ?

[SmartCat]

Originally Posted by carboy

Historically, index funds have outperformed a huge majority of managed funds for decades in the USA. So over the long term, your odds of doing better with managed funds depend on your low odds of picking the small amount actively managed funds which do beat the index.

Originally Posted by ashokrajagopal

See, the passive investing makes sense only when a small percentage of people are doing it. More passive investors means more money flows on to the indexes which are created, which is essentially actively steering cash flow into these specific stocks. .

Ashok Rajgopal is bang on target. Right now, everybody is investing in index funds because it is outperforming. It is not very different from investing in bitcoin because it is "going up". Passive investing by majority of participants results in dividing the markets into two baskets:

- Basket 1 will contain 50 or 100 overvalued stocks trading at insane valuations
- Basket 2 will contain the remaining stocks, which will remain undervalued.

What you are seeing a soap bubble that is getting bigger and bigger (especially in the past 10 years).

However, as an investor, it makes sense to allocate some percentage of investments into index funds though. But putting everything in index fund (following the herd) is a bad idea.

[carboy]

Originally Posted by ashokrajagopal

See, the passive investing makes sense only when a small percentage of people are doing it.

What is the proof behind this statement? Is there a limit above the percentage of people or the percentage of money invested in Passive funds beyond which it stops making sense? Is there any research about this?

Originally Posted by ashokrajagopal

By definition, passive means you are not making a dent in the whole market pricing equation as opposed to active investing where you pick a theme.

Where did you get this definition of passive investing from? Passive investing means automated investment which tracks an index. No more, no less. There is nothing about making a dent in market pricing in passive investing.

Originally Posted by ashokrajagopal

More passive investors means more money flows on to the indexes which are created, which is essentially actively steering cash flow into these specific stocks.

S&P500 Market cap covers 75% of the US Market - so it covers a majority of stocks in the market.

Originally Posted by ashokrajagopal

Before they release new ETFs they actually do a lengthy analysis so the index looks good and promising. Once it is released, the cash flow automatically reinforces this and that sort of shapes the prices to go only in one direction.

Are you saying that indexes don't go in the other direction to whatever direction you are implying here.

Originally Posted by ashokrajagopal

It would reach a point where more inflow means they buy more stocks, and more outflow means they sell. In the event of a downturn in the market, there would certainly be a chain reaction of more outflow and that can drive to all kinds of panic. Also must add the fixed inflow like Pension plans etc that are going into these indexes -- what happens when/if these flows stop ?

All these factors are there in Managed fund also, right? In the event of a downturn in the market, there would be a chain reaction of more outflow from all the managed funds & that can drive all kinds of panic? And Pension Plans also do active investing.

Originally Posted by SmartCat

Ashok Rajgopal is bang on target. Right now, everybody is investing in index funds because it is outperforming.

By right now, do you mean from 1976 when Index funds were introduced? Because over long periods from 1976, index funds in the US have outperformed a majority of active funds.

[huntrz]

Originally Posted by digitalnirvana

There's a line of thought amongst some YouTube influencers / teachers that MF fund managers charge too much for what they return and its better instead to just buy Nifty Index funds or stocks of companies which make up the Nifty.

What do you think @smartcat and other gurus? Is there any merit in this line of thought?

You will have to see who is giving the advice. These kind of ideas are also peddled frequently by people selling products related to stock analysis, trading and investing in shares directly. Obviously they would want people to move away from managed mutual funds. Their next advise usually is how you can beat the index on your own by picking select stocks from Nifty 50. Similarly people/business making a living out of distributing mutual funds or MF investing platforms or other tools(valueresearch) will frequently downplay investing in real estate, gold or investing in equity directly. For example check this-

https://economictimes.indiatimes.com...w/74254736.cms

We can agree or disagree with the views but we must also see through the reason for bias in the opinions. Infact I agree with his opinion in the article.

In the end we pay for what we get -the returns. PMS services have much higher costs at the assurance of higher returns. Even the brokerages take their cost when we buy sell shares and non direct MF distributors do all sorts of paperwork and research for you in return for trail commission. In the same way Fund managers are charging for the service they are providing.

[SmartCat]

Originally Posted by carboy

By right now, do you mean from 1976 when Index funds were introduced? Because over long periods from 1976, index funds in the US have outperformed a majority of active funds.

I'm afraid you are not getting our side of the argument - because you are fixated on returns only. For a moment, ignore "returns". Or else, somebody else might say investors should put their entire networth in LITHIUM, because that has outperformed everything else since 1976.

What is the proof behind this statement? Is there a limit above the percentage of people or the percentage of money invested in Passive funds beyond which it stops making sense? Is there any research about this?

This is logical, no? If everybody invests in same set of stocks, it will go up, up and away. That's how bubbles are formed (tech bubble, infra bubble etc). Right now, we are experiencing the formation of "Index stocks bubble".

Passive investing means automated investment which tracks an index. No more, no less.

There is more to it. Who creates the index? Take NIFTY for example. Every 6 months, stocks enter the index and go out of the index. How do you think that happens? It's a myth that index investing is "passive" investment. Instead of a fund manager, you are now depending on a committee at NSE, who decide which stock enters the index (based on certain parameters).

S&P500 Market cap covers 75% of the US Market - so it covers a majority of stocks in the market.

It "covers" the majority, but the weightage of each stock in the index is decided by a formula. Smallest stock in S&P500 probably has 0.01% weight as the largest stock. Just because S&P 500 covers 75% of US market, it does not protect the investor from buying overvalued stocks.

[ashokrajagopal]

Originally Posted by carboy

What is the proof behind this statement? Is there a limit above the percentage of people or the percentage of money invested in Passive funds beyond which it stops making sense? Is there any research about this?

Where did you get this definition of passive investing from? Passive investing means automated investment which tracks an index. No more, no less. There is nothing about making a dent in market pricing in passive investing.

I think the studies on why passive investment is a wonderful thing etc is from early 90s by Sharpe (the same Sharpe behind the ratio). But if I remember correctly, passive is clearly defined as somebody who sits by the side and does not actively transact, but just follows whatever index they are following.

Fundamentally, why do people hit losses when everybody is after that one thing called alpha? They make an error of judgement by overvaluing a stock, or undervaluing a stock, right ? The judgement of value of stock is based on many things, but mostly the prime factor is the price you pay for it. Now, come to Index funds.
Lets say the market exists without any passive investing, and the index exists right there, in which case, it reached there for real reasons outside indexing. Now, enter passive investing, which specifically targets these stocks by buying them in the given ratio. As the amount of passive investing increases, the prices of these stocks are automatically inflated because of these buys. And soon it gets into a cycle where more people invest more money "passively" and then that money actively makes the prices go up. This is no different from an "Active" investor who keeps investing in Tata everytime they see a news about Tata, without judging the value of the stock to the price they pay. It is similar, not same.
Effectively, once the percentage goes to a substantial number, you are not tracking an index, you are making and maintaining an Index. Whatever you call that, it is not passive.

If substantial number of investors out there invest exactly in the top 500 or whatever stocks in that percentage, that effectively means the top 500 remains top 500 for ever. But that really is not the point of having a stock market, right ? Eventually the stocks will or wont deliver and the higher value prices paid for all the wrong stocks will come back to hurt the investors. A bubble is rarely called a bubble until it bursts. Whether it bursts or it just fizzles out with undelivered alpha that all the passive investors actively hoped for is anybody's guess.