InvestorQ : If Micheal Burry is right about the index fund, what's another alternative?
riya Ranade made post

If Micheal Burry is right about the index fund, what's another alternative?

riya Ranade answered.
11 months ago
As far as I understand, Micheal Burry’s beef is with passive investing or index funds. He feels that massive inflows in the passive investing space are distorting stock prices. He is speaking in the context of US equity markets, not India. Indian equity investing is still at a nascent stage as compared to the US. In India, the story is likely to be different given that it is a growing economy.

In a growing economy, it's not uncommon to see active mutual funds beating benchmark indices sometimes with a high margin as the market provides many opportunities to grow. In the U.S the average return of the benchmark is ~6%. So, if a fund outperforms the index by 33%, it will generate ~8% returns, and post fees (of 2%), returns will be back to 6%. Investing in a passive strategy will lead to similar returns as active investing (mutual funds). In India, the average market return is 12%. So, if a fund manager outperforms the index by 33%, it will lead to 16% pre-fees returns. Post fees of 2%, returns will be 14%, which is the long-term average of mutual fund returns. In this case, active investing is better than passive investing.

More importantly, you don’t need to contain your mutual fund choices to index funds. You can very well choose from other sub-categories of funds. This will help you in two ways-

  • You can shield yourself, at least partially, from the benchmark.
  • You can enhance your potential to beat benchmark returns.
There are huge benefits to diversification. By spreading your portfolio across several mutual fund schemes, you avoid a common mistake: putting too many of your eggs in one basket. If your goal is to beat the market, you can't be the market. In other words, if your portfolio is leaning towards Nifty50, you'll never achieve outperformance. That means you have to strike a fine balance in your portfolio in such a way that concentration on schemes does not make or break your portfolio.