1. Chosing 65:35 ratio as benchmark while knowing that 35 was their upper ceiling in foreign stocks and they were always lower than this is an issue. Because nasdaq100 has done better it shows benchmark in better light. On real benchmark (like 75:25) they have generated alpha. This is like bending the data to show what you want to say
2. Only Indian stocks have been compared to nifty500. But foreign stocks return has not been compared to nasdaq 100, why because it has created alpha over nasdaq 100. Omitting data to show the narrative one wants to
3. Regular fund have been chosen, which has an expense ratio of ~2% so even the optimal chosen benchmark has been beaten by 2% before fees. So fund manager has done some work.
4. Indexing also comes at a cost so indexing by oneself will not have the same return as the optimal benchmark but lower than that
I dont think a retail investor can rebalance everymonth. and can you explain how they able to reproduce average of two indices with 40 only stocks. i think this is bad article which is based on your biases
Hello index investor. Retail investor can choose to re-balance every month. there are tools like smallcase which make this very very easy. The reason for retailer not to do is because of taxation benefits that would accrue when using a MF vehicle. Regarding the comment on reproducing the index, please note stock markets are extremely correlated. Please see https://rsharat.substack.com/p/review-of-kotak-flexi-cap-fund where I show that the behavior of 450 stocks index is almost replicated by just 50 stocks or that Nifty50 is very similar to Nifty500 stocks. I do not suggestion causation but rather correlation. Fund manager's choice of stocks results in outcomes similar to what I suggest. I shall leave the judgement on the article to others. Please do point out any flaws in the data and I am open to correction. I can assure you that I have no bias. I have drawn conclusions based on the data itself.
To Rajiv's credit, he took the call to invest in Nasdaq stocks in a Flexi cap fund.
1. NAVs are reported on a daily basis. The performance evaluation time horizon is shrinking. investors are rushing to funds that have performed in the last 6-12 months. Most fund portfolios are hugging indices with a few opportunistic momentum picks. Who has the time to wait for 3-5 years to play out their thesis for stock picking?
With short-term performance pressure and a cost of ~2% in regular plans, It will become more difficult for fund managers to outperform indices in the future.
Good one, all this really makes sense but can we quantify the expense ratio an individual is paying for this International diversification versus the Debt taxation one has to pay, if he/she is willing to replicate the performance of this fund by investing in NASDAQ index fund.
Anurag, when the scheme was launched, the taxation of a equity only scheme was NIL in India. Today (since 2018 April), we have 10% taxation with no indexation benefits. Debt fund taxation is taxed at 20% but with indexation benefits. So think of following assumptions: Assuming Nasdaq100 returns 12% pa for 25 years (I highly doubt that going forward), Assuming inflation of 5% in India (reasonable I would assume), the total delta after 25 years is less than 3% in final delta in post taxation payout. If the cost of the fund (TER) is more than 0.12% (3%/25 years), we are essentially at the same place. I hope this makes sense.
Couple of points:
1. Chosing 65:35 ratio as benchmark while knowing that 35 was their upper ceiling in foreign stocks and they were always lower than this is an issue. Because nasdaq100 has done better it shows benchmark in better light. On real benchmark (like 75:25) they have generated alpha. This is like bending the data to show what you want to say
2. Only Indian stocks have been compared to nifty500. But foreign stocks return has not been compared to nasdaq 100, why because it has created alpha over nasdaq 100. Omitting data to show the narrative one wants to
3. Regular fund have been chosen, which has an expense ratio of ~2% so even the optimal chosen benchmark has been beaten by 2% before fees. So fund manager has done some work.
4. Indexing also comes at a cost so indexing by oneself will not have the same return as the optimal benchmark but lower than that
I dont think a retail investor can rebalance everymonth. and can you explain how they able to reproduce average of two indices with 40 only stocks. i think this is bad article which is based on your biases
Hello index investor. Retail investor can choose to re-balance every month. there are tools like smallcase which make this very very easy. The reason for retailer not to do is because of taxation benefits that would accrue when using a MF vehicle. Regarding the comment on reproducing the index, please note stock markets are extremely correlated. Please see https://rsharat.substack.com/p/review-of-kotak-flexi-cap-fund where I show that the behavior of 450 stocks index is almost replicated by just 50 stocks or that Nifty50 is very similar to Nifty500 stocks. I do not suggestion causation but rather correlation. Fund manager's choice of stocks results in outcomes similar to what I suggest. I shall leave the judgement on the article to others. Please do point out any flaws in the data and I am open to correction. I can assure you that I have no bias. I have drawn conclusions based on the data itself.
To Rajiv's credit, he took the call to invest in Nasdaq stocks in a Flexi cap fund.
1. NAVs are reported on a daily basis. The performance evaluation time horizon is shrinking. investors are rushing to funds that have performed in the last 6-12 months. Most fund portfolios are hugging indices with a few opportunistic momentum picks. Who has the time to wait for 3-5 years to play out their thesis for stock picking?
With short-term performance pressure and a cost of ~2% in regular plans, It will become more difficult for fund managers to outperform indices in the future.
Good one, all this really makes sense but can we quantify the expense ratio an individual is paying for this International diversification versus the Debt taxation one has to pay, if he/she is willing to replicate the performance of this fund by investing in NASDAQ index fund.
Anurag, when the scheme was launched, the taxation of a equity only scheme was NIL in India. Today (since 2018 April), we have 10% taxation with no indexation benefits. Debt fund taxation is taxed at 20% but with indexation benefits. So think of following assumptions: Assuming Nasdaq100 returns 12% pa for 25 years (I highly doubt that going forward), Assuming inflation of 5% in India (reasonable I would assume), the total delta after 25 years is less than 3% in final delta in post taxation payout. If the cost of the fund (TER) is more than 0.12% (3%/25 years), we are essentially at the same place. I hope this makes sense.