New Delhi: With relatively inferior work-life balance, limited understanding of equities and often low risk taking ability, people often find it difficult to create an active investment portfolio. While investing in mutual funds, PMS products are good alternatives, they tend to be high on fee structures. Varun Kapur Yes Bank Former President and currently Independent Investor provides light on the power of index investing. Excerpts:
Index investing is a passive investment technique that attempts to generate returns similar to a broad market index. It’s a hands-off approach eliminating biases and uncertainties that often occur in a stock-picking strategies.
Varun Kapur said early investors in index funds should note the following:
Investors can pick between various indices. There are some globally tracked well established indices like NIFTY, SENSEX, MSCI Emerging markets which have a demonstrated track record
Investments in the above mentioned indices gives exposure to large cap stocks which are inherently lower risk compared to mid / small caps. This means investments in these indices give investors exposure to proven companies with a demonstrated track record of growth, profits, dividends etc.
Index investing is as liquid as investing directly in stocks and provides a diversification strategy as the portfolio limits any form of concentration (unless one chooses a thematic or highly focused index). They are also available to investors at lower cost as compared to mutual funds, PMS, etc.
Index owners constantly monitor the constituents of the index and laggards (for any reason) are replaced with better performers from outside of the index. This ensures that the quality of stocks that comprise the index do not get diluted at any point of time. This important factor is assumes significant importance in the index delivering good returns as constituents are at all times highly diligenced, well performing corporates with proven and successful business track records (more so for indices with large cap constituents). This can be seen in the annualized returns (over the last 5 years) of the above mentioned indices:
SENSEX – 13.6%
MSCI Emerging Markets – 13.0%
Now considering the above are passive investments, have a lower level of risk owing to their diversification and investments in large / proven corporates and the constant monitoring / replacement of its constituents, their annualized returns are highly attractive. While not generating an alpha (unless one takes risk in thematic / focused indices), these indices over the medium to long term have provided significantly better returns compared to passive investments in debt.
So before you consider your investment strategy going forward, do give a thought to allocating some funds to large, proven indices for relatively safer yet attractive returns, said Varun Kapur.