Old World Map

All the Way from India Comes a Voice of Reason

Old World Map

At Index Fund Advisors, one of the things that we like to keep an eye on is the emergence of indexing in other countries. As the second most populous of the four “BRIC” countries (Brazil, Russia, India, and China), India is expected to become a leading economy of the future, so what happens there matters.

Although indexing in India is at a very nascent stage, there are some articulate voices speaking out on its behalf. Among them is Uma Shashikant who penned this article in The Times of India. In 2004, India launched its National Pension Scheme (NPS), which is a defined contribution plan that started with government employees but has now been made available to the general public. Plan participants have a wide range of investments to choose from—which is both a good thing and a bad thing.

Ms. Shashikant outlines a six step process for assuring that the transition from defined benefit plans to defined contribution plans goes as smoothly as possible. What caught our eye was her third step where she makes a cogent case for indexing:

“This is why index funds make so much sense. There is no fear of choosing the wrong fund or the wrong manager. There are always funds that outperform the index, but there is no way that an investor or advisor will always select that winning fund, before its winning performance is known. Between the reality of funds outperforming the index, and the practical ability to participate in that outperformance, there is the devil of fund selection. Choosing an active fund manager among the competing managers in NPS will only lead to higher confusion. The managers would deliver out-performance, except that different managers will do well at different times and no one will know how and when to choose the right fund.”

As you may be aware, S&P Dow Jones Indices conducts a semi-annual study of the performance of active funds compared to their benchmarks. We wrote about the most recent one here. In mid-2012, they evaluated the Indian market, and as with the U.S., they found that a majority (51%) of active funds across all asset classes failed to beat their benchmarks.

We strongly encourage Ms. Shashikant to continue being a voice of reason, and we sincerely hope that her sound advice does not fall on deaf ears.