If you have been an Indian equity investor, you have gone through a lot of trauma, right?

What would have happened to the American investor?

You would have still gone through or you are about to go through a lot of turmoil.

Let me explain.  If you were a big rich American investor there is a good chance that you would have invested lots of money in :

American Gilts and Emerging Markets.

When Interest rates rise, bond values fall.

So the interest rates are rising in the USA – and this will dramatically impact the returns that the investors are getting on their bonds. They enjoyed 4 years of fun – when the Fed had a zero interest policy. When interest rates went down, the bond prices went up, and there was a portfolio going up party.

Now with interest rates going up, the value of the portfolio will go down and wipe out all the gains UNLESS he exits the bond markets NOW.

So the American investor – who has lost and is losing on the debt market portfolio will turn to his Emerging Markets Portfolio. The Emerging Market portfolio – let us say he entered in 2010 – would have been at Rs. 45 to the dollar, now it is 68 to the dollar!! So whatever gain (cannot see it!) he has made on the portfolio, he will lose at least that much on the exchange!

So it has not been a great picnic for the American investor too. Of course if he was happy with value investing and had stuck around in some kinda index fund, he may be laughing all the way to the bank…..but whoever heard of a common man using an index fund?

Laugh or feel sad depending on where you are..!

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  1. I am assuming that, by index fund, you meant equity index fund. Not gilt index fund.
    So basically you are comparing US equity with US gilt. US equity is winning this time. It is expected. Sometimes equity wins, sometimes debt.
    What I am pointing out is index fund (representative of passive investment style) is not winning. It is the equity asset class which is winning.
    Obviously enough has been written about how passive investment wins over active investments in mature and well regulated markets like US. But in this article, index funds are winning because participating in equity not because of their investment style.

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