Use index funds to diversify internationally, says Pratik Oswal of Motilal Oswal AMC

The debate on active vs passive mutual funds refuses to die. All the talk about a repeat of a narrow rally in the stock market has revived the debate. Shivani Bazaz of ETMutualFunds.com spoke Pratik Oswal, Head - Passive Funds, Motilal Oswal Mutual Fund, to find out how a index specialist like him view the scenario. "Index funds are getting popular with the Do it yourself (DIY) investors today. Large investors are also warming up on the idea of having a part of their equity allocation in index funds today as a part of their core allocation, " says Oswal. Edited interview.

Many mutual fund advisors and investors seem to be warming up to the idea of index funds in India. As a specialist in index funds, how do you view the scenario?
Index funds are getting popular with the Do it yourself (DIY) investors today. Selecting a mutual fund today is a daunting task, and index funds offer simplicity in fund selection and asset allocation. Large investors are also warming up on the idea of having a part of their equity allocation in index funds today as a part of their core allocation. Concerning industry flows - it's been primarily driven by EPFO and other pension funds today.


International investing is a big theme today. We have seen a considerable surge in inflows in international index funds (especially the US).

A repeat of a narrow rally or money chasing a few select heavyweight stocks in index is the main reason why many investors are considering index schemes. Do you subscribe to the view that the market is likely to see a narrow rally this year?
The investment management industry is obsessed with studying past trends and using them to predict the future. Unfortunately - a good advisor or investor understands that the past has little meaning, and the future cannot be predicted. Asset allocation, as a result, is a sound strategy for all investors.

Yes, the index is currently over-weight on a few stocks. As a result, index schemes work well as they prioritize size over everything else. However, the index is adaptive over the long-run. The index used to be oil and Gas, industrials 15 years ago. Today its financial services and tomorrow it may be something else. The index always evolves.

The performance of passive vs active funds in the large cap space is closely watched by everyone. With just four months left in the calendar year, the performance chart has both active funds and passive funds. Do you think recategorization made it difficult for actively-managed large cap funds to outperform the index?
The recategorization has overall helped the common investor. An investor who is investing in a large-cap scheme can expect a lower risk than a mid-cap fund. This distinction was not very obvious a few years ago.

Underperformance could be attributed to narrow rally, too. In a usual scenario - small companies tend to do better than larger companies - but the last 12-18 months have been the opposite. It's similar to what is happening in the US. Also - bear markets tend to favour well established large companies.

How about other important categories like mid cap and small cap – will actively-managed schemes continue to beat their respective benchmarks?
Index investing offers simplicity over everything else. An investor who is unsure of which mid and small-cap fund to select can be relatively happy with an index fund. Having said that - there remain inefficiencies in the mid and small-cap segments for effective stock-picking.

A low-cost vehicle to invest in stocks – is that all there to index funds?
Simplicity, low cost, and the ability to adapt to changing market conditions are the main features of index investing.

What is your advice to investors looking to bet on index funds. What are the dos and don'ts?
My advice would be to allocate the core part of the portfolio to passive funds. This part of the portfolio should not be touched for long- periods. Use index funds to diversify internationally and invest in both bull and bear markets.

Investors should not chase past performance, churn mutual funds, and not try and time the market. Peter Lynch once said, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves."