Indexheads is now 1-Year-Old
Issue #17
Yayyyy, Indexheads is now a fussy, annoying one year old toddler 🎉🥳Thank you all so much for reading and encouraging us to be even more loud and fussy!
This newsletter is a result of a series of lucky coincidences and none of it was planned. It all started with this tweet and then Anish agreed to help and then the newsletter became a reality.
We published the introductory post last Independence day and so began the journey of Indexheads. The idea with the newsletter was to help investors understand the fact that the Indian active mutual funds were mostly all talk and no substance. In the aggregate investors weren’t getting the value they were paying for.
There were just a few active managers who talked the talk and walked the walk. Rest of them were comfortable hugging benchmarks and making their bonuses, investors be damned. Most of the industry was just benchmark +/- 2-3%!
And when it came to debt funds, the state of affairs were even horrible. The serious mismanagement of debt funds by the top AMCs have resulted in retail investors permanently losing 100s of crores.
We started publishing long rants and screaming at people that costs matter and most Indian active funds were utterly, completely, totally useless. And then luckily others like Mr Boiling Frog, Avinash and Anubhav graciously agreed to write on the newsletter.
Today, the newsletter has 1800+ subscribers. If you had told me that more a couple of hundred people would be reading our rants when we started, I would’ve laughed it off.
Highlights
I’m incredibly proud of all the pieces we’ve published. Some of the most read issues:
Let's start from scratch, shall we?
The delusion of alpha by Avinash
Is my beta smarter than yours?
Lessons from a true investing superhero
A "balanced" life with Index Portfolio
ETF Liquidity - Facts v/s Myths by Anubhav
Without this fund, your portfolio is doomed
Some words
Mr Boiling Frog
Passion is inversely proportional to the amount of real information available.
— Gregory Benford
The financial markets throw out a lot of information. The 12th standard kid on your floor is good at reading cash flow and a ninth std kid understands more probability than the 30 to 35-year self that is super confident to go to work and become a millionaire by spotting the next big company. And yet you won't understand the difference between value and momentum. You are never going to make money when genius is a commodity. The hot fund managers will come in the cycle and go. They will make money on fees. If they were smart they would have multiplied their own money by investing on their own. So for you, you beautiful genius, there is a solution. Invest in an index fund. Remove your girlfriend’s photo from your wallet and replace it with Bogle. And now live your passion. Have fun... become an indexer and read Indexheads. Take a walk on the wild side
Nifty is like the Indian cricket team. Performers stay, non-performers go. And legends like MSD retire when their time is up. The best eleven walk out to represent the country in every match. Similarly, best performers over the years continue to maintain their place in the Index. Individual companies come and go, but the Index continues to march alongside the development of the companies it comprises. There is a process at work here which picks the best and delivers for you over time. So let the index create wealth for you over time and keep reading IndexHeads.
Looking back
In the last year, there’s been a lot of positive developments in the Indian index fund space. The index funds AUM which I view as a proxy for retail interest in Index funds has almost doubled from Rs 5,972 to Rs 11,777 crores.
ETFs, which are again dominated by Nifty and Sensex index funds have also grown phenomenally, thanks to EPFO now investing 15% of its incremental corpus in these 2 index funds. These flows have also made SBI Nifty 50 index fund the largest mutual fund in India.
Shockproof
The other positive was that in spite of the monstrous volatility from Feb to April, index funds took in money every single month except for the tiny outflow in July and I consider that a strong positive. I wouldn’t go so far as to say retail investors have matured, but this is a positive nonetheless.
In the US, index funds really took off post-2008 which was probably the greatest crisis of confidence that shook the asset management industry. I think index funds in India will really hit the mainstream after the next recession and serious bear market whenever that is.
The claim that active funds provide downside protection has been proven demonstrably false, it’s another bullshit claim they make. I still don’t understand why you want to pay 1.5% to an active manager to take cash calls when your asset allocation takes care of that. Cash calls also turn managers into geniuses when the reality is that they might have just gotten lucky.
Dual identity
Right after we published the first issue of the newsletter, Motilal Oswal MF launched a series of index mutual funds including the first Mid-cap (Nifty Mid-cap 150), small-cap (Nifty small-cap 250), and multi-cap index funds (Nifty 500). It also launched the first S&P 500 index fund in India. They clearly seem to be betting big on Index funds, given that they’ve always been known for their active funds.
ICICI Pru seems to be taking the Nippon route and betting on the popularity of ETFs. It’s slowly building out a suite of sectoral and factor (smart-beta ETFs) which at least see some volumes in a day as opposed some ETFs which have been orphaned by AMCs.
Other AMCs like L&T, Axis, Birla and several others have launched and filed to launch more index funds. This shows that active management is getting hard and generating alpha isn’t as easy waving hands-on CNBC TV18.
But what has been hilarious to watch is the reasons that these AMCs have been giving for launching index funds while they’ve espoused active views since their inception. Look, the more AMCs launch index funds, the better it is investors because it keeps the costs low and creates a weak incentive for AMCs to make an effort to ensure the tracking error of these funds is low.
Some AMCs are not launching index funds just because they suddenly found the light. They are launching them as insurance. If investors become smart by accident, checking their account statements and shockingly discovers that most of their active funds are utterly useless, they’d at least want to keep the money in the house instead of letting it flee.
Something is better than nothing. But over a period of time, some investors will wise up and start smelling the roses and realizes there were no roses and it was all premium scented bullshit all along.
Expect more AMCs to slyly launch index funds. But a good deal for investors because costs will remain under pressure as more AMCs jump on the indexing bandwagon.
What’s next?
We’re going to continue making more noise that the Indian mutual fund industry, by and large, is not adding any value to investors but rather subtracting value because they charge you an arm, a leg, and a piece of your kidney. A lot of you guys have asked us to write about things like picking index funds, asset allocation, international investing and other topics and we’ll over a period of time.
I’ve personally grown more disillusioned as I’ve learned more about the Indian mutual fund industry and I’ll spend a lot of time highlighting the shenanigans of AMCs.
We’ll also try to get other smart people to come and write on the newsletter. If you are a smart person and are reading this and have something to say to the readers, hit me up and we'd love to publish your views. If you guys know someone that should write something, please do let us know.
This newsletter has been an incredible labour of love and I have enjoyed every second of writing it. Thank you so so much for reading every issue, sharing it and for all your feedback and suggestions, please do keep them coming.
Congratulations to the team and all the 1800 subscribers too. I would suffice to state that I am no longer an'ACTIVE FOOL'
Dear Team at Indexheads, congratulations on completing the 1 year milestone and 1800+ active subscribers. The post are informative to say the least and i do read and share them regularly. The articles shared have enabled be and a few friends to get on to the index bandwagon and i hope that with time, our tribe will keep growing...... Keep up the good work