Should Investors Opt For ETFs Over Active Funds?

Should Investors Opt For ETFs Over Active Funds?

Dhruv Mehta: I believe that even in large cap space, the alpha is not there in last 1-3years. But over 10 years, even in large cap space there is a possibility of alpha generation. If you are looking at Nifty 50 stocks, the allocation of first 5-6 stocks, like Reliance and TCS make up the top and that’s what will contribute. If you go to 50th stock, the allocation would be 1percent or negligible. In investing besides stocks selection, allocation is important of how much to allocate to each stock.

An equal weighted index is better than a market cap-weighted index. Compared to an equal weighted index fundamentally weighted index in the sense that allocation which I invest in company should not be determined to its market cap. It must be determined by the fundamentals of that company. This is my hypothesis. That in long term, a company which does better will give you better returns. Not necessarily,the company with the highest market cap.

If you seethe U.S. history, as markets become more institutionalised, you have passive and active money. So, it is zero-sum game. Whoever is buying, whatever is the total return in market, somebody makes more than that or somebody will lose.The total return cannot change as it is arithmetic. In investment framework,you have professional managers and retail investors. With the rise of mutual funds in USA. In 1990, US was about 8-9 percent AUM (assets under management) to GDP and we are about 10-12 percent. Today, US is almost to 100 percent AUM to GDP. At some point in 2000s, the institutional was more than retail investor-based.It’s completely institutionalised market. Professionals are playing against professionals. Therefore, the alpha spread has narrowed, and they’re not making. India will take 10 years to become a fully institutionalised market.Therefore, active fund managers have a big role to play by way of allocation and selection. The SEBI categorisation is giving you spread of 100 stocks whereas Nifty is 50 stocks.

Anil Ghelani: Though there are only 100 stocks, but they are extremely well researched. So,the concept that the fund managers are playing in that define boundary or pool of stocks which are well researched already, if you have leeway of going down beyond 150 an buying few of stocks which are 300th or 500ththen I have my skillset to bring in power and buy few stocks which will give me a kicker.

My personal allocation, 100 percent of my large cap exposure, every month from my salary I draw a certain percentage which goes to large cap which is going to passive fund which is DSP Equal Nifty 50. One allocation is going to SIP into a mid- and small-cap fund. Third is going to ELSS (equity-linked savings schemes) fund through the 12-month period. In the ELSS and mid and small, the allocation of your portfolio manager is multi-cap. Leave out the multi-cap and small cap, in large cap 100 percent is going to passively managed fund. I am aligning with low cost. It is a complementary strategy accessing your equity allocation.

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