index investing 2

Whenever I am asked for advice on investing, I recommend the broader index. I never suggest individual stocks to anyone. For the most, picking stocks is more of arrogance than of skill. Everyone is up to beating the index. Although many mutual fund managers in India have been able to beat the Nifty-50 index, they may not be able to sustain that performance over many years. Even otherwise, for individual investors a simple Nifty-50 index should be sufficient. 

Index funds have not been that popular in India mainly because at the moment many mutual funds have been able to beat the index. They aren't available at cost as low as they do in the US. Despite that I can argue, individual investors should do well if they stick to the index over the next decade or two, or more.

There are 3 things that one should check before one invests in the index. It should be liquid enough to be able to buy and sell at any time. For that to happen, the assets under management should be as high as possible. Their expense ratio should be as low as possible, and why not when there isn't much to do for the manager other than tracking the index? Finally, the tracking error of the fund should be low. The returns from the fund should be able to tell us how closely it is able to track the index. 

In India index investing comes in 2 forms: Index funds and Exchange traded funds (ETF). Index funds let you invest with the fund house, either directly or through brokers (regular plan). ETFs are like stocks traded on the index. You can buy or sell as low as one unit as you would buy or sell stocks. However, index funds usually have minimum amounts to be invested. 

I have listed down 4 ETFs and 4 index funds mainly based upon their assets size. 

These funds are compared with the Nifty-50 total return over the periods selected. Among ETFs, Niftybees offers better liquidity although SBI ETF Nifty 50 has much higher assets under management. Other than that all ETFs have given more than 15% over the 3-year period; more than 12% over the 5-year period; and Niftybees has given more than 16% over 10 years. More importantly, these ETFs aren't too bad in tracking the total return of the Nifty-50 index. The same is true with the index funds. 

Consider this: how many individual investors can boast of returns over 15% over the last 10 years? This boring strategy of picking the index and sticking to it has been quite good in the past decade. We cannot predict how much it will return in the next decade, but suffice to believe that the return should be quite satisfactory. 

What is imperative is to choose the index fund or ETF, and then stick to it for a very long time. Throw the money each month irrespective of the market levels. And this is the best part of the index investing: pe ratios or pb ratios don't matter; implied equity premiums don't matter; whether the market is overpriced or underpriced is irrelevant for the investor. As the investing horizon gets longer, the risk in expected returns gets lower.

Invest in the index, and move on with life. Do what you enjoy instead of fretting over expected returns. The index will take care of your financial needs. Isn't that cool?