(1) Index funds are passively managed funds, which essentially just reflect an index composition. Fund manager does not make any decisions. Hence the returns of index fund just mirrors the returns of index itself.
(2) Actively managed funds are those which have an active decision making and participation on part of Fund Manager. He / She decides which stocks to buy at what price and when to book profits.
(3) Since Index Funds are passively managed, without any research for stock picking, the fund management cost are least, which is around 0.50%
(4) Where as an actively managed funds involves lots of decision making and research.The fund management fee may be in the range of 1% to 2%
(5) Many books written by western authors, particularly Americans would argue that the fund management fees are too expensive in an actively managed funds. Hence they strongly recommend a Index fund. They further argue that the returns out of an index fund and actively managed fund are more or less similar.
(6) The reader / investor needs to understand that these books are written with american markets in mind. The point they miss out is, if an actively managed fund can generate a return much better than an index fund it simply means the fund manager has done his job. And there is nothing wrong in paying a higher fees for better returns. We need to be focussed on what 'Your Investment earns' rather than what the other person (here the fund manager) earns.
(7) Further, in developed countries the returns are often muted. All news about a stock is priced in the market price, hence they offer limited upside for a stock to spurt. But in a Developing country like India, there are lots of news about companies that are not known to the market or public, but known to a selected few who are in close touch with the industry or company. Many news are like wild cats. The news just springs out at the last moment. Hence these 'News in Advance' acts as a big trigger for the fund manager to invest his money and generate far better return.
For instance, a couple of years back, fund managers bought Ranbaxy @ 400+ just before the Japanese Daichi deal. One fine day when the deal was made public, the stock spurted to as high as 650+. Most of the fund managers sold these stocks and booked profit for the investor. Post the euphoria, the stock price declined back to 400+. At the time of writting this article, Ranbaxy was trading at Rs.476. Sometimes this smartness may backfire. But High returns are always married to High risk.
An illustration :
(a) In the table below you would observe that HDFC Top 200 Fund has delivered 16% annualized return when compared to 9% out of an index fund.
(b) To understand it better, Rs.1,00,000 (One lakh) invested in HDFC Top 200 on 2-Jan-2005 has grown to Rs.2,52,301 (Two Lakh Fifty Two thousand Plus) where as the same One lakh would have grown to just Rs.1,72,008 in HDFC Index fund (One Lakh Seventy Two Thousand plus). Though both funds are managed by HDFC Fund management, the active participation and crucial decision making of fund manager has generated excess returns.
(c) The 9% return hardly matches the inflation levels you see in India.
(d) There is a clear out performance of 77% over index fund.
(e) And this return is net of all fund management expenses.
(f) Hence the entire 16% annualized return is earned by the fund manager for the investor.
Hence Investing and staying invested in Actively managed funds could be prefered by Indian Investors. Index funds may form a part of the portfolio but not entirely. You may consider index fund when you donot have competent fund managers to actively manage your money and grow your wealth. But till such time, have actively managed funds as core of your portfolio.
All that the investor needs to do is to identify 'THE BEST' Fund management company to manage his investment and generage decent excess returns when compared to the benchmark or index. Once you have identified 'THE BEST' Fund and invested, just keep monitoring your portfolio once in a quarter. If there is anything grossly wrong, then you may re-do the investment decision. Otherwise Stay invested. You need to trust the fund manager with all good faith.
.
No comments:
Post a Comment