Warren Buffet's love of Index Funds

Recent Berkshire Hathaway’s live streaming of Shareholder’s Meeting was the boon for his admirers. In this meeting he emphasised the value of Index Funds. Where he showed that he made a bet on Long Bets.org with Protege Partners,LLC. in 2008 that over 10 year period the Index Fund will beat biggest Hedge Funds of Hedge Funds. So, Protege Partners was given a choice that it can choose the best hedge funds managed in US and fund manager of that fund will choose smaller hedge funds to make funds of funds of industry’s best hedge fund.

So in this meeting he showed the result which stated cumulative return from S&P Index fund during the period 2008-2015 was 65.70% and of Funds of Funds was 21.97% thereby beating the funds of funds by 43.73%.

He critized the compensation structure of Hedge Funds as said that even boring,sloppy Index Funds can achieve goals with any hyper activeness. This seems to be one of the greatest lessons for Investors as why investor;s couldn’t use common sense and get carried away by so called experts.

Wanting experts in here for their view on this.

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Isn’t the opposite happening in India? Most mutual funds have performed better than benchmark index?

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My own research across various funds and returns showed that there are quite a few active funds in india whose returns is higher than index funds. i too was skeptical on the benefit of active funds whenever i read about them on various websites but the results is what matters and they clearly indicate that active funds in India is better than Index funds.

I too saw the video referred by you where he shows the returns comparing both. if we do the same for India we will still see certain active funds outperforming even after considering their charges (which on avg come to ~2%). If you want to reduce it further you can choose “direct funds” whose charge is smaller still. if you see that post charges any active fund’s returns are less than index fund then you can consider index fund.

In the end it is all about data and thats how it should be :slight_smile:

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I’m myself perplexed by this outperformance of active mfs in India but here’s some reasoning:

  1. India is at the mercy of Fii inflows and outflows so it tends to be more trending than the relatively stable s&p 500. Trending markets are easier to outperform than stable
  2. Indian indices are not constructed properly so it’s easier to outperform
  3. S&p 500 is massive - 500 stocks and mostly all well run companies. Nifty is just 50 stocks. All Indian mfs go beyond this 50 stocks so it’s not apples to apples comparison. (For example nifty jr handily beat the nifty 50 over past several years)
  4. Even the top 50 nifty companies are not well run in India. Case in point: PSUs and PSBs, stocks like DLF etc which are/were part of the index. One can beat the market by simply avoiding these stocks.
  5. India is a growth story while US is a value investing story. So while mean reversion is common in US in India it’s more of a power law.
  6. Indian mfs have not outperformed nifty, the data we see is because we have survivorship bias and a comprehensive database of failed schemes etc is not available for clear analysis.

Now I myself don’t understand or agree with the reasoning above. But at the same time it seems that it’s easy enough to beat indices in India so some combination of above has to be correct.

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Hi @desi_investor

I was tempted to start off my investing journey with passive low cost indices almost a year ago. However, after reading The Thoughtful Investor by Basant Maheswari, I was convinced that the current Indian stock market is more favorable towards sensible individual stock selection by separating wheat from the chaff (pun intended) :smiley:
I think that low cost index investing should be an effective way of investing in indian equities 15 years down the line. By that time the Indian stock market would mature enough to have its own S&P 500 featuring top 500 companies which would be worth investing without much tracking. I am pretty sure that the way the startup culture is brimming in india currently, we would have a fraction of them being worthy enough to be a part of our future desi version of S&P 500 after 2030.

Currently, there is only one sensible low cost index instrument available: Nifty bees managed by goldman sachs.


Does any one know if there is an index fund or etf following S&P BSE Small Cap?

Can anyone explain is there a difference in owning index funds managed by company A against Company B. Or are they all same since they mimic the index?

Two companies can give different returns in index fund.
You have to check two things before investing
1.Tracking error - it is the difference between index return and fund return. Low is better.
2. Expense ratio - management fee. Low is better.

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Any names which you could suggest? Lesser tracking error and less expense ratio

I would advise you multi cap fund for better performance in present scenario. Index investing requires special skill to hold and invest in bear markets for average index performance. Most of the time you will see multi or large cap fund or aggressive hybrid fund beating your performance with lesser drawdown and would abandon your sip in bear market. This will lead to performance being poor in respect to index. If you still insist then go for
Uti next 50 direct growth - better return than nifty in long term with lower expense ratio than icici next 50.

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I compared multi cap equity funds to index fund and computed jensen’s alpha. I got a value at -2.8
%. Please see the link below for more clarity.

You might find this article useful - How to select an index fund (do you really need one?)

I have 20% of my mutual fund portfolio in Index funds - 10% each in UTI Nifty Index Fund and UTI Nifty Next 50 Index Fund

Are there passive index fund investors here? I am curious about your experiences in the last few years.