Thread by @niranjan_mf

Reason to invest in Passive funds... A 🧵

Passive investing is the most simplest form of investing. It may also he called rule based investing where there is no human intervention.

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Most passive funds in India are based on broad market indices which simply puts together a bunch of companies based on their marketcap size and then weight them using Free float marketcap.

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While passive investing should be known for its simplicity, we are guilty of making the narrative a bit complex.

We have been echoing our western counterparts on passives by talking about falling alpha in active, which is too complex to understand for an average investor.

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In India, most investors come into equities to earn returns that are better than FD, Gold and real estate. The 3 asset classes in which Indians have insanely high exposure and trust.

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An average investor coming to equity MF is only obsessed with absolute returns, she rarely cares about relative returns.

I have never heard an investor saying "my fund gave me x% higher return than its benchmark" we usually hear him saying "my fund gave me x% returns"

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The alpha narrative is complex because, to make investors believe in passive investing, we are first creating a belief that active funds may be bad. Which we really don't know would be true or not in coming time.

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Even if it happens (alpha diminishes in active funds) this narrative around alpha is hardly useful for investors who have never invested in equities. Their expectations are not alpha. And we have a large addressable croud of such folks.

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When we talk about alpha and low cost as the only benefit of passive investing, we restrict our communication to only people who understands that language. Who might be investing in equities already. They might care about these views, but an average investor doesn't.

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Passive investing narrative should be simple. It solves the most basic problems for a lot of new investors.

Choosing a right fund could be a lengthy process if you don't have an expert by your side.

Index funds are simpler choice to make for a such new investors.

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Choosing a right fund starts with studying style, performance across cycles, risks, etc.. n continues with reviewing and tracking the fund consistently. This is difficult task for new investors

They can start with passives n later explore active for style diversification.

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In a poll which I did recently. Most people voted for hassle free investing and simplicity over costs when asked about reason to invest in index funds.
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I think a better way to describe passive funds in India is around simplicity, ease to choose and track along with other benefits like low cost and market linked returns.

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Yes, Index funds might be doing better than some active funds, but there are some active funds too which are doing better than index funds.

So the only important reason to invest in index funds may not be alpha, but much more than that.

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With millions of newbies coming to equities first time, it is important to highlight things that are important n useful to them.

Most people struggle in finding a good fund and still want to do it themselves. Passive funds are great solution for such DIY investors.

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People who already have active funds portfolio, passive funds can compliment their existing portfolio very well. It may reduce some risks of underperformance that may come through in an active fund in short term due to different investing style.
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There is great potential for passives in India provided it is packed in a right box that is suitable for investors. I think the phase where people will invest in passive for its simplicity lies ahead of a phase where they will invest because active is not generating alpha.
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