#IM.02- INDEX FUNDS- A WAY OUT

Updated: Mar 29, 2021

The one area in the world of investment which arouses different feelings among people is- Stock market!

Are you the one who thinks you can outsmart others and beat the market?  Are you the one who thinks you can correctly time your entry & exit in the market and choose the ‘hot’ picks consistently? If your head nods in yes, you should rethink your decision!


Mark Twain summed it up well when he said, “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August & February”


Let me strengthen the above statement with a real-world example:-

The Wall Street Journal has been running a Dartboard contest since 1996, in which staff members pick stocks based on where the dart has fallen and then, a set of the professional stock analysts pick their own stocks based on extensive research, and after a reasonably long period of time, 2 portfolios are compared!

And who you think have won it? No, No, You guessed it wrong!  Those professionals were able to outsmart the darts but only for the 57 times out of 100!

However, you shouldn’t shy away from investing in Equity if you have got the knowledge to correctly analyse through various sectors and companies, grit to actively manage your portfolio and patience to trust your decisions even in the bearish market. The main point being, not everybody has the time and patience to actively manage their funds. So, let us look into Mutual Funds.

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INVESTING THROUGH MUTUAL FUNDS


The choices are – 1) Actively managed MFs & 2) Passively Managed MFs.

Being a retail investor, we are generally tempted to invest in actively-managed MFs which are managed by incredibly highly professional fund managers. Let’s play a myth-buster before moving on to the next section.

  1. MYTH: Our incredible Fund managers can beat the market & earn substantial rate of interest.

          FACT: No one can beat the market in the long run. According to a study published in Wall Street Journal, “96% of actively-managed MFs fail to beat the market in the long run and for the rest of the 4%, the doors are usually closed for retail investors.

  1. MYTH: The only cost of owning a actively-managed MF is expense ratio.

FACT: In addition to the expense ratio, there are other costs such as transaction costs, cash drag, soft-dollar cost, load cost & redemption fees that many investors are ignorant of.

  1. MYTH: The management fees we pay is nothing as compared to the benefits.

FACT: That meagre management fees is robbing you off more than 50% of your potential returns. Seems Awkward? Let’s do the math!

If you invest Rs.1lakh p.a. @10% at the age of 25, you would have Rs.3.29 crore of wealth at the age of 65.

But if you pay 2.5% of management fees and follow the same pattern, you will get only 1.79 crores and you will be robbed off nearly 45% of your potential returns!

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IS THERE SOME HOPE?


As quoted by William Bernstein,

“It’s bad enough that you have to take stock market risk. Only a fool takes on the additional risk of doing yet more damage by giving away his returns to others and paying unnecessary management commissions.”

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INDEX fund vs. managed fund.


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To avoid all these risks and reap the benefits of equity, I suggest you buy a well-run Index Fund and own the whole market! By simply buying a Nifty 500 or S&P BSE 500 INDEX FUND, you own a piece of all the companies listed in Nifty or top 500 companies listed in S&P BSE 500 and your wealth will growth until our economy is growing!

Index funds come with all the more benefits as follows:-

– Low Cost of Investment

– Low Transaction and Trading Costs

– Lower Tax Liability

– Peace of mind, most importantly!!

To know more about Index Funds, go ahead and read about it here: https://cleartax.in/s/index-funds-etfs




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