I complete 7 years in the markets this month and I have built my ‘equity portfolio’ in the proportion: 65% Mutual Funds (Mid Caps, which recategorised into large & mid caps) and 35% Direct Equity.
Even though I am highly satisfied with my XIRR and there is absolutely nothing wrong in my equity portfolio, the ONLY factor which is pushing me to shift my entire portfolio into the passive space, is Management Risk.
The alarming rate at which irregularities and opaqueness at the management level are coming to light is concerning, and that too of large cap companies. First it was Hero Motorcorp, then Delta Corp, now Dabur and let’s not even talk about Adani. During these times, where so many balance sheets seem suspicious, passive is the only way forward in my opinion. Very simply, I believe the collective wisdom of every investor and the collective wisdom of the behaviour of the entire country should determine the future outcome of my portfolio, instead of it being at the behest of the management of a bunch of companies. With time, management risk of stocks are increasing rapidly. I really don’t know which company’s balance sheet I should trust even though I scrutinise every last detail. But I can do only so much sitting behind a laptop and maybe active fund managers might dig a lot more.
@nithin and Zerodha Fund house has a mammoth role to play in pushing new and experienced investors into the passive space. Broader market exposure seems to be the only space where investors with moderate risk appetite can build a healthy portfolio and also sleep more peacefully at the same time.
Just curious, what’s your returns on mutual funds and direct equity? I’m more of a mutual funds person, trying to enter the direct equity side. Any tips? Would love to hear.
For Direct Equity there is no way to give you an XIRR, but I am estimating around 13-14% and for MF its 17.21 (40 large 60 mid when I started but current proportion is 65L 25M 10S). But full disclosure currently my entire allocation is 55 debt 35 equity and 10 Gold. I am doing a manual STP into equity so debt allocation will decrease gradually.
I am not sure moving to passive really alleviate your concern.
If you are really worried about company management, then you should actually be looking at active and not passive.
For eg. Hero Honda, any active fund manager which sees it as rogue management, will sell the shares and get out.
however a passive fund will still be forced to hold it, till it remains in index.
Passive offers lot of advantages. But protection against rogue management is not one of them
Portfolio fluctuation will be a lot less in index passive funds.
Yes and that works both way, if your primary worry is rogue management.
Passive funds cannot let go of companies with dubious management, till the time they are in index.
I absolutely agree with you that in index, there will always be junk companies but the risk is far more mitigated as compared to investing in direct equity. Yes sure active funds have the ability to remove such weeds but again the Alpha they generate (the ones who do) is really marginal, specially after recategorisation.