A reader says, “You strongly recommend index funds for new investors. Why do you not recommend switching to index funds to other active fund investors? (Also wondering why you do not do it yourself)”.
“Is it to avoid paying taxes on current gains if the size of the corpus is already substantial? I have also come some distance with corpus at 60X with no goal-based divisions. I don’t see an issue with paying tax on LTCG, though I would avoid STCG. But I still couldn’t push myself to exit active funds. I suppose, in my case, it is irrational hope of better returns and loss of excitement :)”
So, why am I not investing in index funds? Technically this is not correct. I have an index fund in my retirement portfolio – UTI S&P BSE Low Volatility Index Fund. I invested in this at the NFO stage because I believe in low volatility. You see details of other holdings here: Portfolio Audit 2022: The annual review of my goal-based investments.
Similarly, I also believe in the “free lunch called diversification”. Replacing an equity portfolio with some bonds lowers volatility, retains the return potential and does well during sideways markets. See: Why Aggressive Hybrid (balanced) Mutual Funds score over diversified funds.
So if an aggressive hybrid index fund is launched (and I am comfortable with the AMC), I will not hesitate to invest. See: Why we badly need an aggressive hybrid index fund! Naturally, it will not occupy a significant weight in my portfolio but, hey, I like it!
In the meantime, I am not in any rush to change things. I have gone through long periods of underperformance, so some more time will not affect me. Inertia before implementing a proper investment strategy is dangerous. Inertia after implementing it is gold. Of course, tax is also a factor. I have no intention of paying any more tax than I have to. Thank you very much.
This stand may or may not make sense to the reader. But why should it? As long it makes sense to me and does not affect my sleep.
I am happy with my choices. If you are not, then you will have to act accordingly. The “active vs passive” debate is not of primary importance in portfolio management. What matters more is (1) if we have a strategy to meet our future financial needs and (2) if we have the confidence or expertise (via a fee-only SEBI registered financial advisor) to course correct along the way. Where we invest is tertiary.
From my experience, (1) is pretty easy and (2) is pretty hard and being a passive or active investor is irrelevant to both.
The benefits of choosing a simple index fund like the NIfty or Sensex for a young earner are obvious. She starts on a clean slate, opts for a minimalistic portfolio devoid of fund manager risk and can focus on increasing income and building wealth. They don’t have to make the same mistakes that we did.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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