@Sharat I agree with post your points especially the point where can active fund beat an index fund over 2 3 decades consistently no one knows.
But I disagree using Nifty Next 50 as any benchmark. It’s an index which is discovered cutting broad market index and mining past data suddenly having higher returns people think they have found gold. Last 5 years it has not even beaten N50 TRI if you run sip or one time investment.
I think we should still stick to N50/N100/N500 any other index or ratio (50:50 for example N50:NN50) you are trying outsmart the market thus going away from the simplicity and index principle.
It’s like saying S&P lower 250 can have higher returns than top 250. So rather than using market weighted S&P 500 using 2 halves of 250 in ratio 50:50 to get higher returns :) S&P500 or VTSAX are equivalent index in US.
Simple N50 or N100 (whether as a single fund or synthetically created 85:15 ratio N50:NN50) should do the job in India (N500 still has liquidity issues). Anything else you are again doing the same thing which you wanted to avoid when you moved to index investing.
Nifty500 is a top heavy index in that top 50 stocks dominate the performance as the rest have relatively low weight. Unless a fund selects predominantly from Nifty50 stocks, I think the performance will be materially different. I just think that it is good to compare against a reasonably a benchmark which is likely where most funds would be investing into.
As an example here is what the data suggests: Nifty50 stocks behave differently vs niftynext50 or niftymidsmallcap400. But, the niftynext50 and niftymidsmallcap400 behave similarly. Unfortunately, the niftymidsmallcap400 data starts from 2005 whereas that for niftynext50 starts from 2002. I do not think the NiftyNext50 is a great benchmark. I think it is a mid cap index with longest history publicly available. I use the NiftyNext50 only as a proxy for the broad mid/small cap space.
If I were to provide a US equivalent, it is like choosing between the Russell 1000 and Russell 2000 because you know that the behavior of these next R2000 stocks has been different to the first 1000 stocks in R1000
Regarding your comment on nifty50 not beating Niftynext50 past few years, I agree. I have NO opinion on which is a better index to invest into. I am not advising between the two indices. I agree that a broad selection between Nifty50 and nifty450 (if I can call it) would be a good way to get exposure to when large and mid-cap names in Indian market.
Personally, I am not too happy with most ETFs and their liquidity, I would rather choose a FOF for the ETF for most of these. Also, it is easier for most people who would rather not open a demat account.
Agreed on the points & etfs as well. A Nifty 500 would be best option in India if tracking error & stuff can be kept in check. Current one by Motilal is expensive at 0.38 but more importantly AUM & liquidity biggest concerns as well as no competition to keep expense ratio in check. Till then I think N50 via mutual fund is the best option & competition will ensure expense ratio is low.
Also returns & risk I prefer looking at portfolio level. For example, I think if say for 60/40 portfolio (N50 & liquid fund) and I want to increase returns I can either add a midcap fund or simply increase equity to 70 or 75% still get same returns at portfolio level. I prefer second approach than taking NN50 path (I think it's just a data mined index based on past history).
For a retail investor, A simple N50 & Liquid fund gives everything. Once you reach a decent corpus add some S&P 500 for diversification and you are done. Simple & efficient.
Thanks for this article and the comments thereon And reply.
Undoubtedly you are very educated persons studying the nitty gritty.
I'm invested in aggressive hybrid funds.
And I don't know much.
I invented by star ratings years back,and achieved my goals. I don't know if I beat the indices.
What I have to decide is if I should go for 70 % into N50 And 30% into liquid fund Or simply KVP from post office as my corpus is small And income is not taxable.
Thanks Sharat.
You wrote in a way an ordinary man like me can understand.
Hi Bhaskar. I think this beating the index is a metric useless for most people. People want to know that they have a corpus for their specific activity planned (retirement/kids education/life event etc.). I think it was Jason Zweig who wrote in "The Intellgent Investor" that we don't engrave people's tombstones "This guy beat the market". None cares.
I am happy that your financial goals are met. My personal suggestion would be to avoid KVP purely from a convenience perspective. I think most post office schemes are trouble when you reach senior citizen age and I see the problems people around me are having.
Sharat, You wrote: "Less than 40% fund beat one of indices. This is also a reason why one must choose to avoid investing into all NFO unless a lot of information about future portfolio formation is disclosed." If anyway less than 40% funds beat indices, and portfolio formation anyway will change and will be "passively managed" in the real sense, in most cases, why should NFOs be avoided? I ask this in all sincerity, as someone trying to understand all of this as a new investor. I understand it is not clear for NFOs how and where the money will be invested, but if current MFs perform dismally vis-a-vis indices, then anyway a simple investor has no other option other than take his chances.
If possible, please elaborate and suggest a way out for those examining NFOs rather than current funds where they already put a disclaimer "Past performance is no guarantee of future performance, or whatever"
@Sharat I agree with post your points especially the point where can active fund beat an index fund over 2 3 decades consistently no one knows.
But I disagree using Nifty Next 50 as any benchmark. It’s an index which is discovered cutting broad market index and mining past data suddenly having higher returns people think they have found gold. Last 5 years it has not even beaten N50 TRI if you run sip or one time investment.
I think we should still stick to N50/N100/N500 any other index or ratio (50:50 for example N50:NN50) you are trying outsmart the market thus going away from the simplicity and index principle.
It’s like saying S&P lower 250 can have higher returns than top 250. So rather than using market weighted S&P 500 using 2 halves of 250 in ratio 50:50 to get higher returns :) S&P500 or VTSAX are equivalent index in US.
Simple N50 or N100 (whether as a single fund or synthetically created 85:15 ratio N50:NN50) should do the job in India (N500 still has liquidity issues). Anything else you are again doing the same thing which you wanted to avoid when you moved to index investing.
Nifty500 is a top heavy index in that top 50 stocks dominate the performance as the rest have relatively low weight. Unless a fund selects predominantly from Nifty50 stocks, I think the performance will be materially different. I just think that it is good to compare against a reasonably a benchmark which is likely where most funds would be investing into.
As an example here is what the data suggests: Nifty50 stocks behave differently vs niftynext50 or niftymidsmallcap400. But, the niftynext50 and niftymidsmallcap400 behave similarly. Unfortunately, the niftymidsmallcap400 data starts from 2005 whereas that for niftynext50 starts from 2002. I do not think the NiftyNext50 is a great benchmark. I think it is a mid cap index with longest history publicly available. I use the NiftyNext50 only as a proxy for the broad mid/small cap space.
If I were to provide a US equivalent, it is like choosing between the Russell 1000 and Russell 2000 because you know that the behavior of these next R2000 stocks has been different to the first 1000 stocks in R1000
Regarding your comment on nifty50 not beating Niftynext50 past few years, I agree. I have NO opinion on which is a better index to invest into. I am not advising between the two indices. I agree that a broad selection between Nifty50 and nifty450 (if I can call it) would be a good way to get exposure to when large and mid-cap names in Indian market.
Personally, I am not too happy with most ETFs and their liquidity, I would rather choose a FOF for the ETF for most of these. Also, it is easier for most people who would rather not open a demat account.
Agreed on the points & etfs as well. A Nifty 500 would be best option in India if tracking error & stuff can be kept in check. Current one by Motilal is expensive at 0.38 but more importantly AUM & liquidity biggest concerns as well as no competition to keep expense ratio in check. Till then I think N50 via mutual fund is the best option & competition will ensure expense ratio is low.
Also returns & risk I prefer looking at portfolio level. For example, I think if say for 60/40 portfolio (N50 & liquid fund) and I want to increase returns I can either add a midcap fund or simply increase equity to 70 or 75% still get same returns at portfolio level. I prefer second approach than taking NN50 path (I think it's just a data mined index based on past history).
For a retail investor, A simple N50 & Liquid fund gives everything. Once you reach a decent corpus add some S&P 500 for diversification and you are done. Simple & efficient.
Sharat And Ajit
Thanks for this article and the comments thereon And reply.
Undoubtedly you are very educated persons studying the nitty gritty.
I'm invested in aggressive hybrid funds.
And I don't know much.
I invented by star ratings years back,and achieved my goals. I don't know if I beat the indices.
What I have to decide is if I should go for 70 % into N50 And 30% into liquid fund Or simply KVP from post office as my corpus is small And income is not taxable.
Thanks Sharat.
You wrote in a way an ordinary man like me can understand.
Keep it up and I shall read.
Hi Bhaskar. I think this beating the index is a metric useless for most people. People want to know that they have a corpus for their specific activity planned (retirement/kids education/life event etc.). I think it was Jason Zweig who wrote in "The Intellgent Investor" that we don't engrave people's tombstones "This guy beat the market". None cares.
I am happy that your financial goals are met. My personal suggestion would be to avoid KVP purely from a convenience perspective. I think most post office schemes are trouble when you reach senior citizen age and I see the problems people around me are having.
Sharat, You wrote: "Less than 40% fund beat one of indices. This is also a reason why one must choose to avoid investing into all NFO unless a lot of information about future portfolio formation is disclosed." If anyway less than 40% funds beat indices, and portfolio formation anyway will change and will be "passively managed" in the real sense, in most cases, why should NFOs be avoided? I ask this in all sincerity, as someone trying to understand all of this as a new investor. I understand it is not clear for NFOs how and where the money will be invested, but if current MFs perform dismally vis-a-vis indices, then anyway a simple investor has no other option other than take his chances.
If possible, please elaborate and suggest a way out for those examining NFOs rather than current funds where they already put a disclaimer "Past performance is no guarantee of future performance, or whatever"