Why the Passive funds will overtake Active funds Unnoticeably
There is a concept of efficient markets in international finance and Capital Markets.
This refers to the true and transparent valuation of all the companies and the same data being available to everyone who is interested, in real-time across the world.
In the market there are a lot of stories and rumours and perceptions regarding various policies of the government and the corporate world. In the developing economies like India due to the various Nexus between the corrupt government officials and the corporate world this information is not circulated and rather the Mis information is spread widely.
If you will notice the developed economies do not have many public sector units like India in fact their Federal Bank which is the central bank like our own RBI is also privately-owned .
This results in fewer people having access to internal happenings of a particular company and even if they have such information, the controls are so strict that no-one would consider indulging in insider trading.
In a developing economy due to absence of sufficient and deterrent penalties even if such practices are uncovered the punishment is largely like a slap on the wrist.
In developed economies like US, the relevant public vigilance body has sufficient incentive to keep snooping upon people with grave misconduct and the penalties are severely and sufficient deterrent. Best example of this is Rajat Gupta the founder of ISB Hyderabad and A very respected name in the US corporate circles and his Srilankan accomplice.
In India so far even if sach malpractices are discovered the penalty is largely monetary as was in the case of HDFC MF front desk trading.
Because of this information being available to some select people and the fund managers, they tend to leverage this information and hence the active funds which they manage, perform or try to outperform the broader market and the index funds which are dependent on it.
However things are changing and SEBI has become a toothed tiger and has started observing and handing out penalties and in the same fashion RBI is also becoming sufficiently aware.
Recently the prize for reporting (whistle blower) successful insider trading has been raised from 1 CR to 10 CR.
All these small steps will lead to the information being reported on the portals regularly as is presently being done by every company to the stock exchanges and SEBI.
PSU companies like IRCTC are reporting even the running and stopping of trains to SEBI and the exchanges.
I distinctly remember as late as 2018, the heads of most of the mutual fund companies and also Dhirendra Kumar of value research used to say that active funds will still rule the roost for a decade whereas I was very sceptical of their stand.
In 2007 when gold bees NFO was introduced, I knew that the change had arrived.
Few of the AMCs who introduced the etf and other passive funds did it in imperceptible way that few noticed the arrival.
Now you can see the steady rise not only in the AUM of index and ETFs but also the trades volume.
Passive funds did take the market by surprise after March last year but me not continue to do so in the shorter term.
And now slowly you will not only have asset funds for equity but also debt securities.
About 10% of the employees provident Fund money is channelled into SBI Nifty ETF.
Even though Nifty BeES is an older ETF, because of the above reason it's AUM is smaller but traded volume is much higher.
Strategies: even with the short history of passive funds now you have various mutations and combinations to think of e.g. whether to go for Nifty and junior Nifty separately or just invest in nifty 100.
All should you invest in nifty equal weight.
Should you invest in NV20 or in Nifty low volume.
Soon the choice will become even more.
With the clear choice of the investor to directly invest because of technology , the process will be simpler too.
So please be vigilant. Something which is simple can also lead to mistakes.
Do your own research; take in the articles that you read as information and not knowledge. Knowledge will be what you will do and achieve on your own.
Since the field is new the advisors will know as much or as less any of you.
God speed thee.
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