Index Vs Active MF

• Index: Passive MF

• Active MF

Efficient Market Hypothesis

• Mostly the right price of stocks is reflected in market, since people are continuously looking for cheap stocks

• If you see something irrationally cheap, it might be a trap so don't pick it

Requirements for the Market to be Efficient

• Should have many investors who are looking for cheaper stocks with lot of buying power

• DII and FII come with bulk of money and grab the cheaper stocks

Costs that can be saved if markets are Efficient

• Fund Manager cost required for analysis - 0.5% -1%

• Distribution cost of MFs - 0.5-1.5% - regular Funds

• Direct Fund only has Fund Manager cost

Is it worth paying a Distributor

• Advisor look at past performance and recommend a fund

• Its not certain to replicate past performance

• It won't add any value

SEBI's Definition of a Distributor and an Advisor

• Trying to make Direct plan popular

• Distributor is person who sells commission based Regular MF

• Advisor is person who has license to advise on investing. He is not allowed to sell Regular plan, only Direct plan. He earns by advisory fee.

How to Switch from a Regular to Direct Plan

• Stop new investement for Regular and move to Direct

• Look for switch option based on exit load applicable

Is it worth paying the Fund Manager Fees

• Expected to benefit the Fund Manager rather than clients - Still open to conclude for Indian markets

Million Dollar Bet : Warren vs Hedge Funds

• Hedge fund are similar however more freedom to invest

• 2008 to 2017 bet whether Active Hedge Fund could beat the Passive Index fund

• None of the HF was able to beat index

Are Indian Stocks Market Inefficient

• Does concept of Index fund be optimal in Indian context

• Indian MF managers called out index doesn't apply for Indian market, as market is not efficient - there is chances of cheap stocks to be picked

• Critic: Wouldn't it an option for overseas fund manager to pick benefit from cheap markets in India

• FII and DII hold 60%, should not be inefficient with both looking to cash on any inefficiency in market

Which one to pick

• Important life goals should pick Index fund - Error in MF\Stock performance (top Vs last) won't impact the goals. Index average return is better than choice of MF\Stock performing low Vs Index

• Other money could pick the Active MF, Sectorial, Individual Stock for Wealth Maximization

Why Index is difficult to beat

• MF managers have high expensive 1-2%, keep most money in market upto 80-100%

• MF don't get much money when market is inefficient and in bear

• MF get most of the money when market is in bull and high

Index Vs ETF

• Index is preferred

  • SIP is easy, no Demat required

• ETF

  • Recurring transaction charges with SIP or regular investments

  • Potential liquidity issues - with demand and supply