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In an earlier Article we covered some of the reasons people give for not investing in Index Funds (Most are not even aware such a Passive form of investment ). Read Index Funds.

We continue where we left and cover a few more cases !

“Sahi Hai” means correct choice in Hindi 🙂

Case 3 : My Actively managed Fund has consistently given 20% returns in the past

Mutual Funds have this Disclaimer “Past performance is no guarantee of future results”. If only people would take this disclaimer seriously. Its like statutory warning issued on Cigarette Packs “Smoking causes Cancer” , earlier this used to be “Smoking may cause Cancer” that gave smokers a small hope that few might get cancer and its never them 🙂 . Have you seen the gory pictures of throat cancer that go on every cigarette pack these days?? .

The Disclaimer on Mutual Funds should actually read “Past Performance might be luck, in future, our luck will run out for sure” with a picture of a person who lost money 😉 .

This is a classic case of Survivorship Bias.

Survivorship bias or survival bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways. It is a form of selection bias. – Source : https://en.wikipedia.org/wiki/Survivorship_bias

Lets look at a few examples

Example 1:

Example 2

Army surgeons about armor plates: If you are tasked to develop a better personal armor for your soldiers, and you ask the combat surgeons which area do they perform surgery the most. They would say “arms” or “legs” and you will be misled by “survivorship bias” to create thicker armors for arms and legs.

The surgeons would not say “heart” or “liver” because whomever are shot in those area are long dead before reaching surgery table.

Example 3

Coin Flippers in a room : We put 100 Managers in a room and ask them to flip a coin. By probability theory atleast 50 Managers will be able to get the result you asked for ( Say HEAD ). We then send the losing Managers out of the room and continue the experiment with remaining 50. This time we have 25 Managers that were able to get what we asked for. ( Say HEAD again ). If we continue this experiment we will end up with ~4 Managers in the room. Can we now assume that these 4 Managers are extremely talented in flipping coins and can always get you the desired outcome ?

Coin Flippers in a room is exactly what is happening with today’s Fund Managers and their Funds. The Funds have been on top only due to the fact that the losers in the game are not being spoken about. There have been thousands of Mutual Funds that have been shutdown due to bad performance and the remaining few that claim to have beaten the market have the uncertainty attached to them , whether it was because of Fund Manager’s SKILL or pure LUCK.

You might have experienced this first hand… Why is it that a Fund which was a rock star performer does bad as soon me/you start investing in them ? 🙂

Entire stock Market is a ZERO SUM game. If one Fund Manager is making profits, someone out there must be making losses. If we get this basics of stock market, probably we all will tread our financial path very carefully.

Non performing funds are merged with the one having high returns by Fund Houses to hide their shortcomings. The cycle is repeated and customers are made to believe that all is well.

Case 4: My Financial Advisor will minimize my losses

“We may not outperform the market but we will make sure to take active measures to protect you when the market is down”

– Financial Advisor and I charge exorbitant fees for this.

If we look at the Fund performance when the tide is high this rosy picture that they paint looks very real. In a market downturn like 2008 and the recent ending of 2018 all Mutual Funds have had a blood bath.

As soon as the Fund performs badly the client hurriedly picks up his/her phone and tell the Financial Advisors to switch the Fund amount into a better one. ( Have seen this happen right in front of me and I dont stop them from doing it, Some lessons are better learnt the harder way ). Everytime you switch a Fund your corpus attracts atleast 4-5% . That’s a lot of capital lost if one repeatedly does it.

Best advice is to spend your valuable time with your loved one’s. Dont break your head trying to time the market , find the best Fund and track the market for the best possible opportunity to double your money.

The world’s top 10 fastest growing cities in terms GDP are all in India !! – Oxford economics.

Most of the World’s economy invests in Index Funds of India. Did you know that even Life Insurance Companies and Public Provident Funds invest in Nifty 50 ? This allows PPF to guarantee the steady return of 8% ( and are making 12% by investing in the market ). Insurance company dont guarantee any kind of growth for your money and hence is one of the worst investment vehicles !

Insurers don’t pay out all the money they collect right away. Rather, an insurance company will collect money in the form of premiums, invest that money, and then pay out claims as needed at some future date. The difference between premiums collected and claims paid out is called insurance float. This float used wisely to invest in good businesses is what made Warren Buffett one of the richest in the world.

Investing in Index Fund allows you to put your money in auto pilot mode , do an SIP every month and come back to it when you want to retire. Forget all the turmoil that happens everyday and the non stop news channel discussions by so called Market Experts about which stock tanked and what will do great.

Look at the chart for Nifty 50 since its inception , there have been gut-wrenching crashes, but the market on a longer run has always moved up !!

Hope these articles on Index Fund have helped one realize the benefits of Investing in Index Fund. If you still feel that Active Funds are the best way to Financial Freedom , please try it out of 5 years. Then 5 years more until you come to a realization that nobody can beat the market on a longer run.

High Risk = High Returns : There is not such thing!

If you were told High Risk meant high chances of losing money… a small change in statement would create panic and all the money would be pulled out of the market

In next articles we will see how to diversify your portfolio. What are the other forms of investment apart from Index Funds available in India !

Please read the disclaimer carefully before making any investment based on the articles published on this Blog !!