See, that’s the common misconception. That theory does not apply to developing economies, in developing countries there is a still a lot of things that are unclear, the nations political and economic policies are prone to change which makes investors worried. What you call as cyclical downturn should not in theory occur in a country like India with a strong positive growth but it appears to be the case which means that problem could only be a structural one. This is not Wall St where a matured investor takes a calculated risk without paying heed to policy changes, this is an avg nifty investor we are talking about - the level of risk that people are taking in the midst of economic uncertainty is humongous and your market cycle theory will take a homerun if something crashes tomorrow.
Whatever works for 
I dont like invest in Mutual fund , but i like to invest in AMC stock , i am doing sip in ETF , but i dont like to do sip in Mutual fund ,anyway @RahulKhanna great article posted i like it
ETF is a MF which trades on the exchange 
If you don’t want to take fund manager risk, just buy the whole market (index funds).
I read a lot about people recommending moving to ETFs, and now to Index funds - I can understand why, but whenever I go through SIP return calcs for various funds, good actively managed so far give clearly more returns.
Now I know most sip calcs don’t take into account the varying expenses etc - but even then the difference in xirr is quite noticeable.
The only reason I can think of right now to move to Index funds is if someone just wants to start a sip and leave it (lazy portfolio basically). Or am I missing something and messing up my basic analysis.
I knew this question would come up but for the sake of simplicity, I didn’t write it. In hindsight things are easy. If you pick any of the top performing you looked at today, there is no guarantee that the fund is going to deliver similar performance. Mean reversion is the truth in the markets. What has done well historically has to do worse.
Even historically over 50% of mutual funds across categories have failed to beat the respective benchmark indices.S&P publishes a periodic report called SPIVA which analyses this.
Picking a good performing fund in advance is hard. But in the large-cap space it is pointless to pick a large-cap fund. Large-cap funds charge up to 2%, but you can get Nifty 50 exposure for 0.09%, and NIFTYBEES ETF fro 0.05%. In the mid-cap space, there is a case to be made for picking active funds but the dispersion in performance there is reducing, meaning all funds on average will pretty much do the same. Motilal has lunched the first Mid-cap index fund, which makes indexing easirer.
Small-caps are hard to but but Motilal has a fund for that too. But I don’t even know why people invest in small-caps, they are useless.
Now coming back to the original question, why are funds finding it difficult to beat benchmarks?
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Strict categorization guidelines. Earlier, funds had the relative freedom to do what they want. Even if a fund was from the large-cap category it used to hold mid-caps to juice returns. This is no longer possible. SEBI has strictly defined the category and stocks to invest. Large-cap fund can only invest in the top 100 stocks. If all the 40 AMCs can only do that, where will the outperformance come from?
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Mandatory benchmarking to total return indices
What is total Return Index index and how is it calculated? - #4 by portfolioplus911 -
High costs. Indian funds even by global standard charge too much.
Thanks for the detailed info - and I agree, for the future, and maybe the long-term Index funds are better. But right now, and probably for the next few years wouldn’t you say it’s better to stick to good actively managed funds in each category (i.e. Large Cap only a few funds have outperformed, but they have done so consistently - and continue to do so).
i.e. axis bluechip (exp 0.64%) vs hdfc sensex (exp 0.1%) - is the expense difference big enough to say the index fund is better, even though sip calcs show the active fund having much higher xirr? What’s the recommended comparison tool which takes into account expenses (if that’s even possible) or do they already do so.
I’m not disagreeing with you, but am I not right in saying that for now sticking with those actively managed funds is better than index funds?
Not in my view. The evidence is clear and the jury is out. Let me put it this way, take any large-cap fund, the average expense ratio is 2%, these funds can only invest in the top 100 stocks. The Axis Nifty 100 Fund costs 0.16%. So, just to match the index fund returns, an active fund has to deliver 1.84% extra return and on top of that deliver more to beat the index and other funds in the category.
What are the charges if I do monthly SIP of 10000 in index funds ETFs or Bees through Zerodha? @RahulKhanna
Index funds, no charges.
ETFs, brokerage is zero but the statutory charges will be applicable - Brokerage calculator – Zerodha
If you get a time machine I would request you to go back late 90’s or early 2000’s, and see what were the situation of the economy.
If you get a time-machine I would request you to go into the future and comeback with a bit of commonsense.
Index fund NOT EQUAL TO CDOs.
CDO = Wrapper on an existing asset class, which was tranched out.
Index fund = mutual fund. No exotic wrapping.
Just because smart people something doesn’t make it true. I can argue all day WITH DATA against this absolutely silly/dumb view but it’s been distorted beyond recognition, so it’d be pointless.
Future nobody has seen, that makes your comment worthless.
Really dude? You are one who made a time-machine comment.
Yeah, everybody knows that. In the link he was implying how Index Funds can be a time-bomb like CDOs
I know, doesn’t make it true. Like I said, if it’s anything other than he said, she said, I can argue all day long against this nonsesne.
Its not nonsense, its economics. Markets aren’t really affected by quarterly performances or the so-called “cycles”. Markets are affected by broad policy changes and other macroeconomic factors. To dismiss a valid argument as nonsense just make a point isn’t going to cut it, at the end of the day its the average investor who is going to take the blow of making the wrong choices based on somebody’s misleading jargon. I am here just putting the other side of the argument so people can see through the bs.
I used time machine analogy because I want you to feel the real environment of those times when everybody was talking about doom’s day is coming,there is no future of India, Indian economy bound to collapse etc. etc…
You don’t need a time-machine for that, you need google. The 1991 reforms was a turning point in the Indian economy, its because the govt made a huge policy shift and adopted market economics there was a positive turn in the growth of the country. Today its different, the conservative approach of the govt and many wrong decisions like tax-terrorism, multi-slab gst and demonetization are making the investors worried, this means markets can be unpredictable. All I suggested was to wait and watch rather than rush prematurely into some major investment decision.