Whom to trust is a worry? Use index funds

The trust that we all have on big organisations is dwindling if not reduced to zero. I have shares in 2 groups where I have some contacts with the promoters, top executives, mid level executives and some operational people. The reaction of each of these people to the slow down and the recovery process is very different. That is a major issue. Too many executives feel ‘salary’ is their right, and have no clue about their role in the P&L.

Some of the ‘older’ promoters are not happy with the moral values of the next generation. Then there are some of them who think nothing of breaking rules but will scream murder when their employees break rules – like Raju of Satyam sacking employees for making false vouchers!

In this scenario what can you do as an investor? Frankly the best advice is “I am as lost as you are”. One solution seems to be index funds – but index funds too have an issue. For example if you have a Rs. 50 crore portfolio in the sensex and the nifty you might be over exposed to many companies that you do not want, and you may not have exposure to some companies that you want. Now what?

One solution seems to be to invest in ETF. Say 11% of the sensex is Infosys – and you are not happy with that – is there a solution?

Well take the weights of the industries in the sensex and invest in that industry etf to that extent. Let me explain. If Infy, TCS, and Wipro make up 16% of the weightage in Nifty. You should invest 16% of your investible money in a ‘technology’ etf. If banking is 13% of the weightage in the Sensex put 13% of your money in a bank etf. By doing this you are really reducing the concentration risk in your portfolio.

Because if a company with 11% weightage in the Indices that you are in does a Satyam, you will lose 11% of your equity portfolio (assuming you are perfectly indexed) – and that is not small. If you have put 14% in a Technology etf the chances are your exposure to one company may not be too much.

Of course Warren Buffet may call this creating a mediocre portfolio – but if you do not have WB’s IQ and involvement (obviously none of the people I know have it) or the size of portfolio – what works for WB may not always work for you.

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2 Responses to “Whom to trust is a worry? Use index funds”

  1. I would say investing in Index ETF is one of the best methods for a person who needs exposure to Equities without investment of time in research of individual companies / promoters etc.

    Investment in index has given a 18% CAGR returns since inception of BSE Sensex. I would like to share my research report on “Historical returns on sensex since 1979” which is available on my blog if you would like to go through it link below


  2. Top 3 Blogs which I would recommend to you in Personal Finance on March 14th, 2010 at 10:27 pm

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