What is the future of index funds in India?….Do u think fund managers can outperform the index over a 30 yr period.?
Thanks for your views…..
Firstly apologies for missing this query.
Coming to your question, it’s a very good one. And not an easy one to answer.
One way to think about it is –
1 – Can fund managers outperform? This depends on how many securities they can trade in and the dispersion of returns in those securities. In India, there seem to be ample opportunities.
2 – Do fund managers outperform? We can look at whether fund managers took advantage of those opportunities and actually outperformed. We should have a factual answer to this, but in India, the classifications of funds are so disorganised that I haven’t seen good studies that answer this categorically. Most conclude that they have in fact outperformed the price indices, but we need to see their performance assessed against total return indices. The last time I did this exercise, the outperformance was gradually reducing which makes sense.
3 – Can you pick the outperforming funds in advance? This is tricky as you need to have more than past performance available since we all know that past performance is not a good guide to future performance. While we do have performance and portfolio data available, it’s in a format that most retail investors would struggle to make sense of. I believe in qualitative analysis too – which means I need access to the portfolio managers, senior management, risk managers, back office etc.
You may want to answer these questions for yourself and come to your own conclusion. Remember you have to re-assess continually as the answers will change over time. There are costs too – in terms of time and money – that you need to consider.
If you conclude no to any one of these, you may want to consider index funds as a lower cost option without having to spend a lot of time continually monitoring mutual funds.