The interest in passive investments has increased in India in recent years. This trend was due to a noticeable outperformance: First, the interest in Nifty Next 50 had increased – as usual after this The index started moving south in 2018. Then the Nifty and Sensex, as some stocks held them while the rest of the market suffered. In this article, I discuss why passive investors should avoid making the same mistakes as active investors.

Before we begin, we need to understand that active fund underperformance is not a “current phenomenon” in India. We’ve already noticed that active mutual funds have struggled to beat Nifty 50 for the past seven years! See also: Active Mutual Funds Poor Performance: Is This a Recent Development?

Except that after February 2018 the opportunities in the lower half of the visibility of the Nifty 50 and Nifty 100 dried up and index funds shot to the top of the return table and the return differential between the Nifty 50 and Nifty 50 Equal-Weight Index was at an all-time high in December 2019. The March 2020 crash lasted until it was rolled back.

We have compiled enough data. In this article I want to discuss the mindset of active and passive investors. It is not necessary to adopt an extreme stance to justify your decisions. In fact, there is no need to justify it at all!

Allow me to explain. The reasons for choosing active funds are well known: “Indian is not a developed market like the US. Finding alpha isn’t that difficult; There are opportunities in the mid and small cap segments. “etc.

Unfortunately, some of the reasons for choosing passive funds are just as extreme: “If you choose passive funds, you will surely beat most active funds in the long run.”

Yes, this is already a fact we’ve seen with US mutual funds: only 582 out of 3,474 US large-cap funds outperformed the S&P 500 in the last 10 years. And it could be a fact for Indian funds in the future too Be MFs (currently around 50:50 which is just as bad – links within the article above).

However, “believing in it” when starting passive funds is no different from expecting a 15% return from a “long term SIP” or assuming that “alpha is definitely possible in the Indian market”.

There will always be some funds that beat the market – today or tomorrow. Only an investor who realizes that it is impossible to pick future winners today should get into passive funds. Otherwise, the moment some funds outperform, the fear of missing out will prevail. See for example: After the market crash, 80% of active large-cap funds outperform Nifty, Nifty 100.

For the would-be passive investor, it should be irrelevant whether 25% or 50% or 85% of active funds are underperforming the market today or tomorrow. Nothing changes the fact that a future outperformer cannot be identified today and active investing means fund hopping based on past data. Everyone likes added returns, but the real passive investor appreciates the real cost of finding alpha.

If a passive investor does not accept this reality, interest in passive funds will wane as quickly as it started. The passive investing gang tends to have a more sacred attitude than you, making it sound like only the alpha seekers are exposed to cognitive prejudice. Try the following:

  • I am invested in a Sensex fund, but everyone only talks about NSE indices. Am i missing something?
  • Which index fund is the best to start a SIP?
  • Can I invest in more of the Nifty Next 50 for more returns?
  • ABC launches the ABC Nanocap Index Fund. I already hold four index funds; Should I consider this NFO to cover the nanocap segment?

Fact-based investing has to guide our decisions, but what makes us stay the course is what we believe in. A sense of superiority in our investment beliefs and decisions is both unnecessary and harmful.

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About the author Pattabiraman Editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and lead author of freefincal. He is an Associate Professor at the Indian Institute of Technology in Madras. since August 2006. Connect with him via Twitter or Linkedin Pattabiraman co-authored two printed books, You can also be rich with goal-oriented investing (CNBC TV18) and Game changer and seven others free e-books on various money management topics. He is the patron and co-founder of “Paid India,“An organization promoting impartial, commission-free investment advice. He conducts free money management sessions for companies and associations based on money management. Include previous engagements World bank, RBI, BHEL, Asian Colors, Cognizant, Madras Nuclear Power Plant, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. Write to Pattu for a chat [at] freefincal [dot] com

About freefincal & its Content Policy Freefincal is a news media organization dedicated to providing original analysis, reports, reviews and insights into developments in mutual funds, stocks, investments, retirement planning and personal finance. We do this without any conflict of interest or bias. follow us on Google news. Freefincal serves more than one million readers (2.5 million page views) annually with articles that are based only on facts and detailed analysis of its authors. All statements are verified from credible and knowledgeable sources prior to publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented are only conclusions that are supported by verifiable, reproducible evidence / data. Contact information: Letters {at} freefincal {dot} com (sponsored contributions or paid collaborations are not maintained)

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