Active management will help INDEX investors!!

Yes please read the headline again. Active management will help the index investors!

Let us look at say the BSE 100 as a representative index instead of the Sensex or the Nifty.

Every IFA will advise his investor to put in say 70% of his money into a large cap fund.

There will be an increasing shift to ETF, low cost index funds, Nps, and the pension plans will invest in the index.

ETFs will get more popular as their liquidity and simplicity catches on.

The traditional fund managers will begin to reduce their mutual funds and wrap them into ETFs at a lower fee. This will reduce their profit margins, but will make them more sustainable. You can see SBI and Icici Pru doing it already.

The strategies utilized by active managers will evolve into systematic  strategies with research showing stock pickers don’t perform well relative to indexers.

Factors will fail to deliver the alpha returns, on average, that many expect and investors will slowly realize that “picking” indices has become the new alpha game!

What else will happen? 

With TRI as the benchmark funds will be forced to buy good dividend paying companies aka Psu stocks in India!

There will be many strategy funds – pharma, banking, psu, psu etf, metals, commodities, infra – they will buy different parts of the 100

There will be equal weighted index funds (DSP had an NFO recently)

There will be regular active funds which will promise higher returns, but will ONLY guarantee higher fees

There will be somebody with a ‘dogs of the index’ strategy, so there will be buying at the bottom of the Index also

There will be tech funds, long short funds, etc. which will buy almost like the indices of tech…

What about an Index fund with REVERSE WEIGHTAGE? WELL do not rule it out!

FII money may go big time in creating and managing indices – but they will track the main indices

If all fund houses have only ONE index fund, the biggest beneficiary will be the index of course!

So when 100 active funds buy different parts of the index…..who benefits? Index fund of course!

So will active fund management disappear in India? No. We will continue to be sold dreams.

 

 

 

 

 

 

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One Response to “Active management will help INDEX investors!!”

  1. Hi subra, are you suggesting that index funds perform better because active funds rush funds into large caps?

    When the velocity of funds coming into market decreases, which funds (active or passive) take a bigger haircut?

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