NEW DELHI: Berkshire Hathaway Chairman Warren Buffett, admired across the globe not only by the analyst community but also retail investors, said investors should “stick with low-cost index funds.”
This guru mantra might work for investors in the US or any other developed market, but may not be that effective in India, at least at the current stage of evolution of the Indian equity market, say market analysts.
Buffett, widely considered one of the world’s best equity investors, said in his annual letter to shareholders that trillions of dollars are managed by Wall Streeters charging high fees and it is best that large and small investors stick with low-cost index funds.
So, what is an index fund?
“There is enough data to support that active fund managers have a role to play in emerging markets like India, which are not most efficient,” Nilesh Shetty, Associate Fund Manager for Equity at Quantum Mutual Fund, told ETMarkets.com.
For example, the SBI Nifty Index Fund has an expense ratio of 0.70 per cent, whereas an actively-managed fund such as SBI Bluechip fund charges 1.98 per cent (as of January 31, 2017). UTI Nifty Index Fund has an expense ratio of 0.2 per cent.
Some schemes fail to mimic returns given by the index, but that is one of the reasons why active fund managers play a key role in adjusting the portfolio to generate alpha for unit holders.