Get active on passive investing

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Global markets guru Jim Rogers says index investing outperforms actively managed portfolios across stocks and commodities. Rogers is not alone. Data supports his observation.

Between March 25, 2020 and March 22, 2021 — the first year of Covid-19 in India — only 3.45% actively managed large cap and less than a quarter of the total midcap mutual funds could beat their respective indices. Smart investors saw this. Index funds and ETF Index schemes have seen Asset Under Management (AUM) of these funds go up from Rs 148,038 crore in March 2020 to Rs 307,886 crore in May 2021 — a jump of 108%.

Yes, the last year has been a black swan event given the pandemic making markets extremely volatile. But long-term data isn’t great for active investors either.

According to a MorningStar India report dated 22^nd March 2021, only half of the total number of mid-cap funds and a mere 11% of large cap funds could outperform the index over 10 years.

Since its lows of March last year, Nifty50 has gone up over 1112%. Investors who would have bought an index fund in March 2020 would have grown their wealth 2.3 times. To put that in perspective, one lakh invested in Nifty50 in March 2020 would be worth Rs 2.3 lakh today.

But data tells is that no more than 11% of actively managed funds would have given the same result. In fact, in 89% cases, investor wealth would be lower than Rs 2.3 lakh today.

This is a bad statistic for fund managers who charge investors an expense ratio with an unsaid promise to deliver alpha. SEBI’s ‘skin-in-the-game’ ruling for asset management companies is timely where compensation for fund managers is, in good part, is own funds.

For retail investors, passive investing in addition to being a better wealth creator, is easier and cheaper. When you buy an index fund, your units include all stocks of an index in the same weighted average ratio as that of the index itself. There is no human intervention, and hence a lower expense ratio, no research and analysis fee.

Index funds are also easier to track and understand for most investors who get intimidated with jargon-laden investment advice.

Retail investors should actively consider passive investing — a cost-effective alternative with richer returns.