Sensex: the rules changed midway!

If you see the fund performance in India, most, if not all fund managers have schemes which beat the the sensex or the nifty. Have you wondered why it is easy to beat the indices in India but fund managers in the US find it very difficult to do so?

There are just too many people whom I know on a personal level who laugh even if they are benchmarked against the index.

Who are the people? and what do they do?

Well these are guys who invest in excess of US $ 1 million. Many of them have a clear idea of their investing portfolio, trading portfolio, and a quasi-trading-cum investing portfolio.

In the third category they will trade ONLY in good quality shares like Cummins, Biocon, Ultratech, L&T, Tata Motors – if things go wrong, these shares will be held for 3-4 years without too much of a worry.

The Indian indices are free float – market cap weighted – and thus dominated by big large companies. This is not such a bad idea if the markets are really free. However in India the biggest player in the equity market is also the guy who makes the rules. This is really sad. The equity markets are getting as bad as the debt markets.

Look at the big market cap companies – Ongc, Coal India, Sbi, Ntpc, the other oil Psus…..- not a very healthy scenario. These shares do not get a good price/earning ratio, and rightly so.

If you are a fund manager can you afford to IGNORE them? No. Your board, your trustees, the financial media will all rip you apart, and under duress you will have to include them. Also if you are to be compared to an index, you might as well invest as the index does.

Unless somebody creates a bench mark like “Sensex WITHOUT THE PSUs” as a benchmark, all the funds will buy the psu stocks. So the government is sure that fund managers have NO choice but to buy their stocks. Even if ALL the investor (forget one FII sitting in UK or US) scream, the government could not care.

The set of people mentioned above deal with the psu companies as a supplier and know that these organisations have no respect for the shareholder.

funny situation – going forward all of you will be able to beat the indices with the help of good fund managers…or in some cases even on your own, but the returns themselves in absolute terms MAY not attract you. So more Indians will stay out of the equity markets – may be sad, but it is true.

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8 Responses to “Sensex: the rules changed midway!”

  1. Should we go with Good Fund manager or a Fund Company backed with good process? I am of the opinion the Fund Company needs to be smart with its aproach

  2. STOP relying on others to make your money work for you, instead understand how things work in stock market and invest intelligently. Is it that simple!!!! To some extent IT IS simple but yet again one needs to take some efforts to have “basic understanding” of how to “read sensex” in general so that they can invest in right assets at right time and get out at right time. TIMING is critical for long term success…..

  3. Interesting and useful pointers. What about some thing like BSE-500?

  4. the traders who hold on to ‘good shares’ because they made trading mistakes are poor traders and probably prone to lots of emotional biases which make them lose money quite often. traders should be unemotional and ignore everything except price movements -isnt that what the great Jesse livermore practised

  5. Subra shed some light on stocks for the trading portfolio because that is the hardest to pick out

  6. Ravinder,

    long ago I used to be an expensive tailor. Today asking me to design a shirt which will fit anybody is amusing, but not something that I can do.

    i invest in shares and trade in shares. In real estate I do funding deals for 2-3 years – never as an investor investing for rent.

    i do deals with friends. Sadly nothing is scalable, at least I do not want to scale. So I teach and train :-)

    advise for traders: don’t. LOL

  7. One cap fitting all is not possible. Thanks for bringing home the point.

  8. Subra sir,
    On one side you suggest to invest in nifty bees. And on other side, you say that nifty contains poor performers.
    I am confused. But it is interesting to know both sides of the coin.

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