If you search about Mutual Funds and tips or advice on the internet, You will get only one result.

So instead, buy index funds or ETFs.

In his partnership letters, Warren Buffett even accepted that Index, though S&P 500 was not famous then and DJIA widely followed, and Passive investing was not a word, is difficult to fight. However, today we witness a revolution-like situation that Vanguard is a huge mutual fund company holding a sufficient significant stake in many companies and need to keep more than 100 people only to keep Vote as proxies.

On the other hand, Many Fund managers, ‘s Including Warren Buffett, Is efficiently Performing better than the Index. So stock pickers are still alive. Though it may sound ancient, someone named Peter Lynch handled Record size ACTIVE Mutual Fund in which he invested from all over the world. In one of his books, he proved that even 8th standard students could Beat Professional fund managers. So now the question is how to build a portfolio for the long term or choose the right mutual fund as the mutual fund itself is also Portfolio, for one objective and not for one person.

So this post is mainly about what I believe about Investment. Before starting with the main topic, check some tweets from Very Intelligent People.

Rajat Sharma, Correctly Points out the Situation in India. For successful Index investing, you need a Keeping Balanced and Good Index with the Right amount of Churning. There is nothing called Passive supporting. The Index is replicated as Portfolio in Passive investing is proof of active choice. One more assumption in Passive Index investing is MARKET IS EFFICIENT AND EVERY INFORMATION ABOUT EVERY COMPANY IS KNOWN TO EVERYONE.

The efficient Market Hypothesis tells us that there are three types of market. Any market belongs to one. The first is weak-form market efficiency, the second is Semi Strong form of market efficiency, and the third is a Strong form of market efficiency. I will mention all of them in as detail as possible for me.

  1. Weak market efficiency will tell you that all current information is the price. The market price is in no connection with past performance. But that information is public and not private. Someone having confidential information may be successful in such a market.
  2. The semi-strong form will tell you that Fundamentalists will NOT be successful as the market reflects all the new information. This assumes that channels that give information to traders about further information are fast a Stock Price quickly adjusts itself. Ironically this also believed that no investor could benefit from such new information. Passive investing is suitable for such a market.
  3. Strong form market efficiency believes that no matter what, no one will earn a return above-average rate of return. Directly indirectly, it thinks that everyone knows everything. No need to go anywhere or choose any specific stock. A bit challenging to achieve this stage.

What is Reality?

Activist investing is also successful in many markets like India. Warren Buffett is not an Index investor and still performing well. Even though we live in the internet era, Value investing is also going on. Even if the whole Theory was Scrapped, the Concept of Technical analysis is still alive. Though we have INSTANT MESSAGING tools, not many are helpful. It is challenging to show cooked books of accounting but not impossible. That’s why Satyam or Enron happened.

I agree that Cost can make or break an investment. It is a myth that SOME ETFs don’t have any cost. Even Vanguard, on their official website, accepts they COST 0.12%. They give you a calculation that they have cost. But it is also true that we need to choose a Mutual fund or ETF with the RIGHT COST.

Turnover Ratio and Diversification are something I believe, Go Hand in Hand. In the era of Index funds like today, Turnover is becoming Taboo. What I think is wrong with Investing in a company that is looking undervalued is keeping yourself invested for quite some time. TILL it is achieving Its good Value or till you find a more exciting opportunity. Not bad. That is what is happening with Index. The minute JP associate, BHEL, is not fitting the Index objective, so It is excluded. To keep Turnover low, You need to choose stocks that are performing Good and have Good fundamentals. Now, what can you say if there are 1000 such stocks? Will you call it extra Diversification or Diversification?

Yes. Portfolio theory Mentioned that you need to keep your eggs in different Baskets. But how many? 20? 30? Peter Lynch Outperformed the Market, holding more than 100 stocks in his Portfolio. Now?

SIP is something nowadays taken very seriously in India. One report suggests that SIP is so favorite that few people invest in a lump sum. Everything is Good. But when something is excessive, not good. Even if it is water.