[carboy]

Originally Posted by ashokrajagopal

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).

No, studies get done regularly, they all reinforce the same thing. This is one from the last year - https://www.cnbc.com/2019/03/15/acti...-indexing.html

Originally Posted by ashokrajagopal

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.

But that's not the case it, both active & passive investing co-exist. It's not as if active investing happens first & then when it hits a certain point, passive index takes over.

Originally Posted by ashokrajagopal

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.

No, it's not the same. Because something like the S&P500 Index has 500 stocks & it covers around 75% of the US stock market. So it's nothing like buying Tata everytime.

Originally Posted by ashokrajagopal

Effectively, once the percentage goes to a substantial number, you are not tracking an index, you are making and maintaining an Index.

So what is that percentage?

Originally Posted by ashokrajagopal

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 what is that substantial number?

Originally Posted by SmartCat

I'm afraid you are not getting our side of the argument - because you are fixated on returns only. For a moment, ignore "returns".

What else is the point of investing?

Originally Posted by SmartCat

Or else, somebody else might say investors should put their entire networth in LITHIUM, because that has outperformed everything else since 1976.

But investing in the S&P 500 Index is very well diversified unlike investing in just Lithium. So it's not the same. And it probably covers investing in Lithium companies also.

Originally Posted by SmartCat

This is logical, no? If everybody invests in same set of stocks, it will go up, up and away.

But it's not everybody, is it?
And even if this is your reason for not investing in index funds, it's just not relevant for India which OP was asking about, right? In India, only a small percentage of people are investing in index funds.

Originally Posted by SmartCat

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).

And why is this is a disadvantage?

Originally Posted by SmartCat

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.

So your point is that active funds protect the investor from buying overvalued stocks?

[SmartCat]

Originally Posted by carboy

But it's not everybody, is it? And even if this is your reason for not investing in index funds, it's just not relevant for India which OP was asking about, right? In India, only a small percentage of people are investing in index funds.

There is no "index bubble" in Indian stock market. That's why, up to 25% allocation to an Indian index fund is perfectly fine. 100% allocation is bad idea because indices can be stuck in a range for 5, 10, 15 or even 20 years. That is, zero returns in this time period. No way will a new investor hold on for such a long time for zero returns. He is likely to get out at a loss.

But during this exact time period, well-chosen actively managed funds would have outperformed indices. If somebody does not know how to choose actively managed mutual funds, they have to spend time researching it. There is no easy way out.

Examples of equity Indices offering zero returns over extended period of time:

1) NIFTY between 2008/2010 and 2014 (4 or 6 years):



2) NIFTY between 1992 and 2004 (12 years)



3) Japanese NIKKEI index is still far away from the peak it reached in 1989



4) Shanghai Stock Exchange index still far away from the peak it reached in 2008



5) Dow Jones has been around since 1880. In the past 140 years, there have been atleast 10 or more instances when index has returned zero percent over extended periods of time.

[ashokrajagopal]

Originally Posted by carboy

No, studies get done regularly, they all reinforce the same thing. This is one from the last year - https://www.cnbc.com/2019/03/15/acti...-indexing.html



But that's not the case it, both active & passive investing co-exist. It's not as if active investing happens first & then when it hits a certain point, passive index takes over.

No, it's not the same. Because something like the S&P500 Index has 500 stocks & it covers around 75% of the US stock market. So it's nothing like buying Tata everytime.

So what is that percentage?

But what is that substantial number?

The "study" that just tracks how active vs passive performs is not a study, its just a report. A study would have to actually deal with why that is happening (could be a multitude of reasons); anyway that's beside the point.
Your whole idea of passive is that it is not doing a relevant play in the market, whereas what I and Smartcat are saying is that beyond a given percentage of people passive is no longer passive, and it is specifically maintaining that index actively.

Active investing happened for a long time and then passive investing came into picture. The percentage of passive investment thru indexes has remained zero or near zero and have increased over time. In relative terms, majority active investing turns to a 50-50 active-passive to a majority passive investing. I think most popular passive investment heavy markets are like that.
About the Tata reference, I wrote they are similar not same, and it is very obvious. If you as an investor are buying 1 stock, 10 stocks or 100 stocks as they appear in news every time, its pretty much similar. A passive investor is doing a similar thing, just buying what everybody else is buying; which may well be diversified, but the mere act of buying these bouquets of stocks increases its price leading to continued inflation of prices. If more number of people do the same thing, more inflation happens.

Now, what is that percentage or number -- this is anybody's guess. Its not a tipping point, it may not even be a decile. One would know when alpha starts diminishing over a period of 5 years. The big players would identify this earlier, so PMS, Hedges etc would get out soon enough, and the retail investors may be left with index funds that have barely moved over a period of time.


To add to this, but slightly OT. Its usually very skillfully crafted hypotheticals that really rule the finance advise industry. I am sure everybody has heard the "If your father bought 10k worth of Infosys in 199X" and "Instead of buying a Bullet, if you had bought RE shares for as much in 2009.." type of stories repeated. The way to measure a hypothetical like that is to scale the whole event to a few thousand people.
Goes like this -- if I had bought RE for 250 in 2009, wow! But what if 10000 people had the same thought and bought RE for 250 in 2009... wait a minute, if 10000 people try to buy it, the price would have automatically gone up at that time and more price means totally different financial outcomes for the company and the buyers.

[carboy]

Originally Posted by SmartCat

But during this exact time period, well-chosen actively managed funds would have outperformed indices.

I am not sure how that is relevant. Nobody ever claimed that Index Funds outperform all active funds. The claim here is that Index Funds outperform a majority of managed funds. I am sure you would be able to find a couple of managed funds which outperform the index at any time.

Originally Posted by SmartCat

Examples of equity Indices offering zero returns over extended period of time:
1) NIFTY between 2008/2010 and 2014 (4 or 6 years):
2) NIFTY between 1992 and 2004 (12 years)
3) Japanese NIKKEI index is still far away from the peak it reached in 1989
4) Shanghai Stock Exchange index still far away from the peak it reached in 2008
5) Dow Jones has been around since 1880. In the past 140 years, there have been atleast 10 or more instances when index has returned zero percent over extended periods of time.

As I said, irrelevant unless the Index didn't outperform majority of active funds during that time.

Originally Posted by ashokrajagopal

The "study" that just tracks how active vs passive performs is not a study, its just a report.

No, it's a study. It's a study of whether index funds outperform a majority of actively managed funds or not.

Originally Posted by ashokrajagopal

A study would have to actually deal with why that is happening (could be a multitude of reasons); anyway that's beside the point.

That would be a study of why they outperform which is irrelevant to the argument here.

Originally Posted by ashokrajagopal

Your whole idea of passive is that it is not doing a relevant play in the market, whereas what I and Smartcat are saying is that beyond a given percentage of people passive is no longer passive, and it is specifically maintaining that index actively.

What is that "given percentage" and is there any data about what happens when that percentage is crossed"?

Originally Posted by ashokrajagopal

About the Tata reference, I wrote they are similar not same, and it is very obvious. If you as an investor are buying 1 stock, 10 stocks or 100 stocks as they appear in news every time, its pretty much similar.

No, it's not. A single stock has very different risk profile as compared to a basket of stocks

Originally Posted by ashokrajagopal

Now, what is that percentage or number -- this is anybody's guess. Its not a tipping point, it may not even be a decile. One would know when alpha starts diminishing over a period of 5 years. The big players would identify this earlier, so PMS, Hedges etc would get out soon enough, and the retail investors may be left with index funds that have barely moved over a period of time.

Yeah, right. As if a majority of active investors have historically identified crashes early & got out.

[SmartCat]

Originally Posted by carboy

I am not sure how that is relevant. As I said, irrelevant unless the Index didn't outperform

Coming to think of it, what is irrelevant is the "average" of all actively managed funds. Who will invest in all 200 actively managed funds in equal proportions?

It is an indisputable fact is that index offers zero returns for extended period of time, which is unacceptable to 100% of investors. During this exact time period, it is very likely that midcaps and smallcap funds offered 3x to 5x returns. I know, because I have experienced this phenomenon since year 2000. After all, index investing is all about investing in largecap stocks. Largecap stocks don't run up all the time (ditto with midcap and smallcap too).

That's why investing 100% of assets in index fund is terrible advice. For Indian investors, a simple SIP plan like this will ensure that portfolio generates decent returns even if Index is stuck in a range.

- 25% in Index fund (or actively managed largecap fund)
- 25% in Midcap fund
- 25% in Smallcap fund
- 25% in Multicap Fund.

If Index is stuck in a range, atleast the midcaps, smallcap or some sector will be chugging along. The rules for picking actively managed fund is the same as before.

- Choose a solid brand name (Birla, HDFC, SBI, ICICI Bank etc)
- Choose an OLD fund. Atleast a fund that has navigated the 2008 crash.
- Assets under management of atleast Rs. 10,000 cr
- 3 to 5 star rated on Valueresearchonline.com
- Go DIRECT, rather than via broker.

[carboy]

Originally Posted by SmartCat

Coming to think of it, what is irrelevant is the "average" of all actively managed funds. Who will invest in all 200 actively managed funds in equal proportions?

Who talked about average of all actively managed funds. Right from the beginning, the debate has been whether the index outperforms a majority of actively managed funds or not. And that fact still remains.

Originally Posted by SmartCat

It is an indisputable fact is that index offers zero returns for extended period of time, which is unacceptable to 100% of investors.

As is an indisputable fact that a majority of actively managed funds perform worse than the index.

Originally Posted by SmartCat

During this exact time period, it is very likely that midcaps and smallcap stocks offered 3x to 5x returns.

Even if they did, please show that the index didn't outperform a majority of active funds during these exact time periods.

Originally Posted by SmartCat

That's why investing 100% of assets in index fund is terrible advice. For Indian investors, a simple SIP plan like this will ensure that portfolio generates decent returns even if Index is stuck in a range.

- 25% in Index fund (or actively managed largecap fund)
- 25% in Midcap fund
- 25% in Smallcap fund
- 25% in Multicap Fund.

There are also small cap & mid cap index funds, right?

[SmartCat]

Originally Posted by carboy

There are also small cap & mid cap index funds, right?

I don't think Indian mutual fund houses offer small and midcap index funds yet.

But Motilal Oswal and ICICI both offer midcap ETFs, that track the midcap index. Sadly, liquidity in these ETF is not so great.

[carboy]

Originally Posted by SmartCat

I don't think Indian mutual fund houses offer small and midcap index funds yet.

But Motilal Oswal and ICICI both offer midcap ETFs, that track the midcap index. Sadly, liquidity in these ETF is not so great.

While speak about Index funds, I include ETFs - they are basically exchange traded index funds. When investing for long term, I don't worry so much about the liquidity. I have owned Nifty ETF & Next 50 ETF (originally Benchmark which became GS & then Reliance & now Nippon) for 10+ years. Even when liquidity in the Next 50 ETF was quite poor (even today it's not great liquidity), I have always been able to buy or sell close to NAV unless I am doing it on those days when there is a huge volatility & those kind of days are few & far between. Even of those days the overall spread isn't very high. On a majority of the days of the year, the traded price is not that different from the NAV.

[Thebat]

Originally Posted by SmartCat

I don't think Indian mutual fund houses offer small and midcap index funds yet.

But Motilal Oswal and ICICI both offer midcap ETFs, that track the midcap index. Sadly, liquidity in these ETF is not so great.

Motilal does offer a Small cap and a Mid cap Index fund but they are the only AMC to do so.

[SmartCat]

Originally Posted by carboy

I have owned Nifty ETF & Next 50 ETF (originally Benchmark which became GS & then Reliance & now Nippon) for 10+ years.

Originally Posted by Thebat

Motilal does offer a Small cap and a Mid cap Index fund but they are the only AMC to do so.

Found it, thanks!

https://www.valueresearchonline.com/...nd-direct-plan
https://www.valueresearchonline.com/...d-direct-plan/

[SmartCat]

Disclaimer:

Investing in equity and debt funds or ETFs is fraught with market risk. All posts on this thread are opinions only. Please do your own research or consult a SEBI registered financial advisor before investing.

[ashokrajagopal]

Originally Posted by carboy

No, it's a study. It's a study of whether index funds outperform a majority of actively managed funds or not.
That would be a study of why they outperform which is irrelevant to the argument here.

Your semantics are your semantics and they can be different from mine. Consolidated tracking of something that is given out for free falls into report the way I look at it.

What is that "given percentage" and is there any data about what happens when that percentage is crossed"?

From the beginning I said, there is no percentage its a logical conclusion. If you want to believe that money pumped into indexes "passively" does not inflate prices irrespective of the percentage, so be it.

No, it's not. A single stock has very different risk profile as compared to a basket of stocks
Yeah, right. As if a majority of active investors have historically identified crashes early & got out.

Different, very different, mildly different -- arrive at your own semantics for this. Nifty 50 I guess once crossed over 40% for Finance for a sectoral calculation, and that is one of the indexes that is not overblown yet. Just picking and maintaining an index like that may sound like diversification for some.
I did not say majority of investors also -- some investors identify and exit at the right time, some do not. Usually the PMS and Hedge funds are in better position to judge it earlier than the average SIP paying "passive" investor. If your theory of "passive" investing never manipulating the market works for you, well and good.

[carboy]

Originally Posted by ashokrajagopal

From the beginning I said, there is no percentage its a logical conclusion. If you want to believe that money pumped into indexes "passively" does not inflate prices irrespective of the percentage, so be it.

This debate is not about whether any kind of investing inflates something or not. This debate is about whether Passive Investing makes sense or not.

My original comment was "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." - to which you replied saying Index investing makes sense only when number of passive investors are small. Unless you define small, this whole debate becomes meaningless.

Originally Posted by ashokrajagopal

Different, very different, mildly different -- arrive at your own semantics for this. Nifty 50 I guess once crossed over 40% for Finance for a sectoral calculation, and that is one of the indexes that is not overblown yet. Just picking and maintaining an index like that may sound like diversification for some.

This debate is not about a particular index. It's about passive investing in general & my original reply to SmartCat was about US index investing when you come in.

Originally Posted by ashokrajagopal

I did not say majority of investors also -- some investors identify and exit at the right time, some do not. Usually the PMS and Hedge funds are in better position to judge it earlier than the average SIP paying "passive" investor. If your theory of "passive" investing never manipulating the market works for you, well and good.

I really doubt if the original guy whose question started this debate was thinking of Hegde funds or PMS as an alternative to Index funds. The debate was always about Index Funds vs Actively managed Mutual funds.

[sagarpadaki]

Originally Posted by SmartCat

Found it, thanks!

https://www.valueresearchonline.com/...nd-direct-plan
https://www.valueresearchonline.com/...d-direct-plan/

AUM is very low for both the funds. Should it be something to be concerned about?

I picked UTI Nitfy Index (Nifty50) over other large cap index funds since it was the oldest and AUM of nearly 2000 crores.

Also, most of the discussion happening here is with the Index scene in the USA. How is it with Indian scene?

[SmartCat]

Originally Posted by sagarpadaki

AUM is very low for both the funds. Should it be something to be concerned about?

For index funds, AUM does not matter. The fund manager has to invest in a fixed proportion. For actively managed funds, AUM matters because the fund house is not likely to give much attention to performance/risk in low AUM funds.

Also, most of the discussion happening here is with the Index scene in the USA. How is it with Indian scene?

Unlike USA, there is not much research on this topic. According to this CRISIL study, majority of Indian actively managed funds beat the index - but data is only for the last 10 years.
Active funds comfortably outperformed benchmarks over most time periods and across fund categories
https://economictimes.indiatimes.com...w/71122585.cms

Originally Posted by ashokrajagopal

Nifty 50 I guess once crossed over 40% for Finance for a sectoral calculation, and that is one of the indexes that is not overblown yet. Just picking and maintaining an index like that may sound like diversification for some.

There are other issues with NIFTY construction too, when compared to S&P 500. Top 10 NIFTY stocks account for 53% weightage.



Source:
Is passive investing suitable for India?
https://www.valueresearchonline.com/...ble-for-india/