Trust in passive, rest must bring data: Investment mantra for better returns
Published by Mint
Abhishek Kumar's role: Wrote this article
Abhishek Kumar, founder of SahajMoney, wrote this column weighing passive against active funds, drawing on SPIVA India data and research on fund-manager overconfidence to argue that investors should favour passive funds until data shows otherwise.
What Abhishek Kumar said
How is a passive fund different from an active fund?
A passive fund simply holds the stocks of a benchmark index in the same proportions as the index, so an investor in one is signing up for a return close to what that index delivers over the period. An active fund pays a manager to try to do better than the index, and that effort comes with noticeably higher expenses. Those extra costs are a hurdle the manager has to clear every year before the investor sees any benefit, which is why I think the burden of proof sits with the active side.
Do active funds in India actually beat their benchmarks?
The long-running independent scorecard that tracks Indian funds against their benchmarks suggests most large-cap active funds have trailed the index over a ten-year stretch, which to me argues for a low-cost passive fund in that segment. The mid- and small-cap picture is less clear: those funds may hold part of the portfolio outside their segment, and the comparison index chosen matters, so some outperformance there cannot be ruled out. Even so, I would not treat it as a given.
Can I identify in advance which active funds will keep outperforming?
I do not think so. A handful of active funds beating the index over one decade does not show they will repeat it, and I know of no dependable way to pick those funds before the fact. The survivorship numbers make the point: a meaningful share of mid- and small-cap funds do not even last ten years. So rather than hoping against the evidence, I would accept what the data currently shows and lean on passive funds until the facts change, and be ready to change my mind if they do.
Why do so many investors still believe active managers will win?
Part of it, I suspect, is over-optimism, the tendency to overrate our own abilities and to feel we control or understand more than we do. A study of several hundred fund managers found roughly three in four rated themselves above average at their job, which is statistically impossible and suggests many managers may be overconfident about their edge. Investors who buy into that confidence inherit the same bias. Recognising it is a useful first step before paying extra for active management.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on mutual funds
An opinion piece by Abhishek Kumar in Mint weighing passive against active equity funds. It cites a survey showing passive funds' share of industry assets rising from 1.4% in 2015 to 17%, a cost gap of roughly 0.8%, and SPIVA India data that two in three large-cap funds trailed their benchmark over ten years, and discusses overconfidence among fund managers.
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Trust in passive, rest must bring data: Investment mantra for better returns
