Welcome to the zero to educate podcast. Everybody gets zeroed. I had a throat infection. So I'm hosting this my name is prateek Singh and I'm the founder of learn app dot go a video education platform where you can learn investing and trading from the leaders of the industry do check out Lana today. We'll be talking about passive investing, you know, the first retail Index Fund was launched in the year 1976 byJack Bogle he's the founder of Vanguard it took a while but index funds at least in the developed markets have become really popular but in spite of all this growth and contrary to the popular narrative passive investing is just a tiny part of the overall Market passive investing just makes about 10% of global industrial Securities and only 15% in the u.s. In India passive forms make about five percent and that's like a rounding error for the Total mutual fund industry to put that into perspective the a un of index mutual funds is just about 6,500 crores in 2019. That's not even a billion dollars in this conversation will be talking all things passive investing and index funds with pretty course. You are the head of passive funds with Mozilla rosewall. Isn't this interesting pratik talking to pretty hair but think hi hi pratik. It's always it's always good to have. Conversation with another protect so I'm excited to serve do this and I look forward to a conversation. Yeah, absolutely. Thanks for doing this man. Yeah, so let's before we start talking about passive investing right? So tell me about yourself. How did you get involved in the markets? Yes, so I've actually I've actually been in the market for quite some time. So I've been in finance for I think almost 10 years. So I think I've started my career in sort of more the tradition Finance so working Investment Banking private Equity but then also actually spent the last five years in actually technology which is more of more of financial technology. So my last gig I was actually working in a company in Silicon Valley where we were Building Solutions on passive products and then selling it to investment advisers and you know, so while I was doing this, you know, I think what I learned was passive investing is obviously great because the products themselves are extremely simple very easy to understand and very effective for investing the long run. But what I also learned is that you know, there's a lot of opportunity to innovate on top of Passage products, you know. So for example in my case, what I did was I took passive products and overlaid it with a strategy and sold it to advisors. So that's how I've sort of been introduced to passive investing and I've been a huge fan, you know, I think the company that I was working at we scale up platform from around 40 million dollars in a um in assets to almost 450 million dollars in a year and a half. So I think that was a lot of fun and I hope up to we don't make a similar impact at Mozilla as well. So that makes sense. Right that makes sense. Why are the head of passive index products at both elevators? Yeah. Yeah. I think I think it's more of the passion. I think I'm extremely I think you know in terms of my personality also, you know, I believe a lot in a lot of Simplicity. I'm going to serve Zen Buddhism sort of a guy. So I think passive products also compliment my personality, which is what I what I like about them. They're very simple easy to And and I think most investors I feel today or I mean, I think all sophisticated investors in the US have adopted this very well and that's why I think I see a lot of opportunity in space. I think what was interesting to think so you've seen both sides now, actually you've seen the u.s. Pretty well. Yeah and you're looking at India now, so what's the difference between the US markets and the Indian market? Yeah, you know, I think us markets are slightly ahead of India in terms of efficiency in the sense that I think in your markets are sort of so I think Historically, you know, if you looked at it the US markets were around between 15 20 years ahead of of the new markets, but I think that is closing down us markets. Obviously a lot bigger and more much more than the number of large cap companies out there. The number of just a mega sized companies lot more. So for example, you know, I think India the top hundred companies are large gaps, whereas in the u.s. To top 500 companies are all large cap stocks, you know, so I think the the market is a lot deeper is a lot more efficient. There's a lot more bigger. Business space and there's also a lot of lot more trading activity happening in the US market. So and I think which which which makes sense because you know, it's a much bigger country as an economy. It's acting five or six times India's GDP. So I think it's always good to know and where we're headed as a market. So I think that experience out there was super valuable and and and I think from the way, you know, I think just the US markets are performed despite being very efficient economy is I think it I think the its precedent that we need markets will Out of go the same way, correct? And I think I understand why you came back to India to run the business because India you probably see what potential India has over the next decade, right? Oh, absolutely. I mean I think opportunity is sort of immense, you know, I have seen it. So I think I've been investing for a very very long time, you know, my family's been investing for 30 or 40 odd years. And you know, what we've seen is just I mean the growth opportunity that has happened India versus where we're headed is is huge and I think anyone was looking to participate in the equity markets today is Going to be super happy. If obviously I think the only challenges is behavioral that markets are obviously a little bit risky in the short term. So what I say is that your risk is short term return is long term, you know, so if you're if you're able to, you know, sort of write the cycles of short-termism then I think you can be you'll be very happy with what's of returns you get in the future cool. Yeah. So for the onions uninitiated who's listening to this, let's just do a quick quick one one line. So what are passive forms? What do they track? So one sentence? Passive funds are funds that track the returns of an index or a benchmark. So by index or a benchmark, I think Nifty or Ascend sex with the example of an index and ideally the Nifty if you invest in a fund that is replicating the Nifty that Nifty goes up by 10% you go by 10% So just purely replicating the returns of Benchmark, right? Perfect. So I think that makes sense and you also probably want to explain what the expense ratio. Is it cheaper than an We managed fund and NY here. So, you know, there's a lot of cost associated with active funds, you know, you have to have I think you have to fund managers and you have to philosophy and I think the reason why active-passive funds are preferred by some subset of customers is because of the cost aspect, you know, I think passive funds are today. I would say in the US and also in India, you know, I think 1 V 2 once 10th the price of an active fund. So if you're looking at maybe one or two percent in expense ratio, and this is obviously the A plan you looking at 1/5 of that in the past - so I think costs are extremely important. And the reason why cause I important is that I think you mentioned Jack Bogle, you know, I'm a big fan of Jack Jack Bogle and what he said is that you know, I think the guys who ended up, you know, creating wealth over very long periods have guys who are focused on cost and on discipline and passive funds make sure that you're focusing on cost. Yeah, and also you took something very simple and just scale the heck out of it and it worked right? I mean Vanguard that was done amazingly. Well. Yeah, exactly. So, you know, I think And God started in 1976 on this is almost 45 years ago and they launched the S&P 500 which is basically the top 500 stocks in the US and just just imagine you this you learn something and 45 years old you survived and today the sap 500 is actually the largest and the most traded index in the world. You know, you're looking at 800 trillions of trillions of dollars that have been traded on the S&P 500. So, you know, I think what we see in is that you know, the number one Simplicity works. So simple product works better than a complex product and number two a know. I think these products have stood the test of time. So in those 45 years, for example, I would say two-thirds or maybe 3/4 of all active funds have either closed down or merged and maybe one or two have outperformed the Benchmark by Say by one or more percent. So I think I think over really long time periods, you know, you really sort of creating or oh well through passengers. Yeah. And to think about it to put this in perspective like I just did a Google Search right August 31st. 2019. Vanguard is managing Five Point Six Trillion. I mean, that's I think what batik was talking about. So if it's simple think about WhatsApp right how simple the product is they were able to scale it so well and it works. So now that we've talked about the passive world with the let's talk about both y'all's. Alright. So this isn't the first time moti. Lal is actually launching an index fund. You guys actually had a passive one in 2000. 10 so what changed till since then and what do you why do you think you will actually succeed now in 2019 so so great question. So actually, you know, most people don't know this but we've actually been in the passive investing space for almost a decade now, so we actually launched India's first ETF. So India's first smart beta ETF, it was called the most 50 remixed by remixed. I mean you take the Nifty Fifty and you change the wages and I think This mod beta product and we launched in 2010 and actually did recently. Well, we got good sort of coverage in a um spur. I think we know what we realize is that back then the knowledge of what people had about passes was quite low. I think you know, even though this is a passive product, you know, we kept getting phone calls from people asking us who's your manager? Why is he buying this stock? You know, I mean and it's very hard for us to say that was you know, there is no fund manager. And there's we have we have this algorithm. That's driving all decision-making. So I think knowledge is less. I would be honest and that's why I sort of V sort of pivoted to an active strategy which is obviously done pretty well. It's more CO2 beliefs and I think this so this is a this is our second attempt was passives. Yeah. Yeah, perfect. So, you know, I mean, I know you've probably people probably ask you this question like a thousand times. Yeah, but every time I take the flight and land in Mumbai or any other airport, I see like this Motel address. And you don't look at it and smile as yeah, it says it says by right sleep tight. So like active is like the part of your DNA, right? So that's how I know you've been in passive for a long time, but it feels like you're more aggressive now in passive I can say that so why is that? Yeah, so I think so our DNA obviously as you said is is active investing is research its stock picking and I think that is our probably mean still obviously biggest strength and it will continue to be a big strength going forward to I mean I am obviously I mean a very committed and to the MC in but but I think you know, I think the how we see this as you know, every portfolio needs some element of Simplicity, you know, so I'll give you my own example, you know, so I when I was managing money for really wealthy people in the US, you know, what and these guys are like, you know, I mean 25 30 million dollars plus in assets super-rich, you know, these guys are like look relatively older folks and you know, what i is what I saw and these guys have obviously adoptive. Update passive funds for say like 10 20 30 years and what I saw was at, you know, like if passive one or effective one, you would have hundred percent portfolio inactive a hundred percent from passive. But you know, the reality is that you know, almost everyone had a combination of both their combination of some active some passive. So I think what we've seen is that you know, I think every portfolio needs an element of Simplicity and that's why passive comes in and I think for extremely long time periods, as I said, you know, I think the the beautiful pass Civ is not about the returns about it's about the risk and it's about it's it's about longevity. So if you're looking to invest or say 10 years plus you're like 25 30 35 roles. You have a long career looking to invest for retirement. So it makes sense to have some food for you where you know, you're sort of hedged from a lot of these short-term things that happen with active fund managers. So I think yeah and also, you know, I think most people don't realize this but you know, I mean just to be like super sort of direct is that you know, a lot of the music Industry today, you know a lot of funds that I've seen today and this is from my obviously very sort of small-time in the space that I like. A lot of them are like the funds that we have are sort of typically Benchmark our goes by betcha mchuggers. I mean, you know, I think most funds do that 1% 1% down sort of performance, right? Oh, wow. I can't believe you're saying this. I really appreciate your honesty. Yeah, you know, it's just it's just that there's I mean and I think that is something that so in the u.s. They call this decor and these funds have actually have been sort of because when you think about it, you know, a lot of these funds are you looking at, you know, two and a half percent expense ratio, they keep a cash cow lows 5 to 10% and then you have the returning as well. So I think fund manager in those funds has to not now but henna from even now in the future has to outperform and by three to four percent just to match the Benchmark which I think will get harder over time. So and and if you see all of these are those was funds or in all our strategies were actually very Focused, you know all our strategies like very like Focus 4535 very concentrated portfolios where you know, I think I mean investors have seen this when we do outperform we outperform like crazy and we are underperforming so we call ourselves Benchmark agnostic. So we have a bearish caller ID, you know, we're more than happy to take a 0% exposure 90, which I think a lot of people won't be able to I think sand as I think that's where sort of we Fittin we we see ourselves as pure Alpha Seekers and we see ourselves obviously now, we're building a business. That's ston just pure beta. Yeah, you talked about John that active has some bit of churn and some of them have a lot of churn. Yeah, but even the constituents of The Benchmark itself also change, right? So is that something to worry about something to think about? Why does that happen? How does the investor see that? So the constituents The Benchmark the a changing is actually know the most beautiful thing and it's a best part about passive investing is literally why bass investing lakhs, you know, you think about it, you know it today 2005 just take back 2005 even looking at The Nifty Fifty which is the top 15 x know most people most people don't know this but 50/50 was not Financial Services heavy. It used to be industrial infrastructure utilities oil and gas whereas today its Financial Services 35 percent plus and tomorrow. It might be something else correct. So actually what's protecting investors is the fact that the Benchmark changes every say 5 to 10 years time, you know, you make sure that you always have the best quality or the best liquor top stocks in India will always be in your portfolio. So regardless of what happens, you know, so lot of stocks who haven't gone back which haven't gone back to the house in 2008. A lot of them actually haven't gone back to the highs today also, but the Benchmark is that is I would say gone up two and a half times since then. So I think passive most aggrieved because you know, it's I would say it's very it follows Darwinism, you know, which is survival of the fittest and it sort of adapts to changing conditions so you can make sure that if you hold a passive one today, you will hold a best 50 whatever it is. In the future. Yeah, I was actually going to ask you this question. But you sort of already quasi answered. What I was going to really ask is an index fund is not created with any fundamentals in mind, right? That's the point. So there's no bias. Absolutely right? There's no budget on liquidity or market cap or something like that. Right and that may cause some bad companies to just pop in right like the yes tank. May pop in at the fuckin Guinea popping. So isn't that a bad thing? Because you know, there's no fundamental involved. It doesn't Defeat the whole purpose of indexing that these guys me just pop up or is that just part of the game? Yeah. So, you know, I think so most I would say that it is a simple passive funds are weighted between by size. So by sighs, I mean the bigger stocks get motivated. The small stocks can less wastage. Yeah market cap weighted and that's how I would say most of the simple passive on the structured and I completely agree, you know, I mean, I think we're looking at a passive fund you will have like we sample the next 50 the Nifty next 50, which is Stop number 51 200 had guys like the hfl. India was which sort of pull down the returns. So I think that is going to happen. But the beauty about it is that you know, it will get kicked out of the index eventually, you know, so I think the index is very brutal. The index does not have I mean, it doesn't have any sympathy for you. So a company that does not deliver will be kicked out of the index very soon and a company that does deliver we get upgraded very soon. So basically you can expect that. So I think what happens in the active spaces You know a lot of people to do Chase returns chasing returns is like big phenomena, I think and Byron passive, you know, you're picking sure that you know, whenever something does well, it's automatically going on the order and you're sort of waited in that keeps them going up over and I've also seen like the companies that get discarded. There are moved away from the index. Suddenly the liquidity also drops and if some companies just joins the event the liquidity just goes up. So clearly people are following the index like much more than this. You know look in the past mirror key. Oh, this was a bad company, but they will be weeded out eventually. So I think that makes total sense. It's even more reason to do index vest. I guess. Yeah, exactly. So I think and and and just to add to the point, you know, the index 0 is actually quite Diversified in looking at 50 100 200 500 stocks. So one or two bad apples will not really make a big difference your portfolio. And and by the time the Bad Apple makes a difference it gets smaller and smaller and more insignificant over time. So wrinkle that is something that investors shouldn't worry. If obviously they're looking for long-term investing if someone's looking to eventually people go suck them suck them who I don't know that yeah, exactly. Yeah. Yeah what yeah, so no cool. Yeah, exactly and I mean, you know, I think we've seen so we've been running passive funds and we've had get Anjali gems, you know that has come like that was numbered cap index and it got thrown out. So yeah, I think we've sort of seen that and honestly the index has really suffered over all because of how small or how If it becomes as it sort of loses value, so yeah, so I think the stocks are go up are actually good for the investor and I see they increase in value. So I think that is I think there's entire sort of methodology of you know, how the other stocks move inside make you a lot of credibility. Yeah, you know one thing I really wanted to understand from you. Right? So basically what the managers doing not the managers purple who's looking after the index fund he's taking the money. He's Distributing it according to the weight adjustment. Of the index he's tracking and basically from that he takes a very small expense ratio and that's what he keeps. Now. This expense ratio is much lesser than the active funds like you told me earlier but a few basis points. Does that really matter with you? Can you explain to our listeners how much of a difference this can actually make you mean expense ratio? Yeah, so it's yeah so, you know expense ratio is you know, I think I think it's very important thing to understand that expense ratio does Matter if you're doing it's a for one or two or three years time, but if someone is really investing for a really long time. So suppose a relatively young investor who's a 25 30 35 is entering the market today and wants to invest for a very long time. Then he needs to think about expense ratio because that 1% adds up into something that I've become quite significant over time. This is this imagine, you know, you're paying 1% every year for 30 years, you know, that that becomes half your portfolio over time, you know, so I think expenses important and you know having said that I the compounding effect also is a exactly exactly as a 30% plus compounding will be like a know 40 45 - 50 % So I think yeah, I think Spencer's important and I think you should have some part of your portfolio that is in sort of low cost funds. Yeah, you know this I'll jump to a different topic completely now, so there's one misconception with the that index finds don't offer downside like what retailers here. All the time is O dat will give you downside. Cushioning if the market goes down right and active funds also say that a lot. So how do you respond to that? I mean index doesn't have debt. Obviously, it's pure Equity. So what does that really mean? No, so I think index funds are exactly like active. I mean, they're exactly the same. You know that I saw, you know, I think there's so the way I see it the mutual fund ads come and you have this guy in the in the end saying index funds are subject to Market risk, you know that is literally the definition of an index fund, you know that it's a because because An active fund is subject to Market risk as well as a fund manager risk. So a combination of two whereas index funds are pure Market risk. And the reason why that is absolutely great is because you know who to point fingers to which the market and the market as you know is volatile, you know, so I think the beauty about you know, as you said, obviously I mean in index funds are just like active on so they get could be more volatile. It could be less volatile than active funds. It depends on what the strategy or comparing it to but you know just to just to Let you know that you know most investors today. I am good proportion of them. You know, I think Johnny of portfolio is is is a bit of an issue and the number one reason to why people join their portfolio is under performance and the second one is capital loss with index funds, you know, you don't really have that under performance happening your portfolio. So there's no Julian need to join the portfolio. So I think it's much more stress-free and which is why I think you know, sort of keeping on to the Cycles or Adding onto Investments for second 15 years is much easier than it is say for an active fund where you met underperform you may not know so I think that is why I think nine in the psychology of investor, which I think is key for long-term. Investing is is relatively less difficulty index and I think I think we should also talk about risk of we should you know, so as you know, so yeah, so I'm a big fan of Warren Buffett. You know, I've gone to Omaha, I've seen him speak. They're really got it. Yeah. Yeah. Yeah. I think I think every A human who's sort of passionate about investing should really like think about, you know, making a pilgrimage to Omaha because it's such an incredible experience. Yeah. It's a pilgrimage. It's the environment is absolutely crazy. It's not very hard to sort of get a ticket to go there and I think I mean if you think and and I think if you think about it, you know, it sounds like the most boring thing in the world. It's like two old guys talking for 10 hours, but they really really do Captivate your attention. So I think he was learning opportunity. Obviously, you know you Can live see it live stream on Google but I think seeing them in person right from anyway, so the coming back to the point that you know, so Warren Buffett learnt, so he studied under this guy called Benjamin Graham, which we who wrote this really nice book called The intelligent investor, which very hard read by the way, actually, yeah. Yeah. Yeah, I mean, but I feel like you know, every time you read you is you learn something new so, you know people who have read it should ideally, you know, I look at such as it is just lean Because I think it's a very it's packed with lot of Simplicity in lot of good insights. And I am one of the insights in the book is is sort of target with your advisor saying that you know, the advisors job is not to manage it on its to manage risk, you know because returns as you've seen, you know mutual fund space. It's very volatile back in like five years ago advisor sold you on 15 to 20% today is 10 to 12% future who knows what'll happen enough but no risk is actually quite consistent, you know as investors we need to think about what A risk we're taking because if you just to sort by return you will end up buying small cap stocks small cap funds which are extremely risky know. So I think the risk is something that's extremely important and index funds are great because because what I have for what we've seen by data is risk is actually quite consistent. So Index Fund raise today was there is ten years ago as being exactly the same whereas an active fund the ranges are massive you can have an active on that as having a standard deviation of 6% You can have a profound as Aviation of 20% and that so you might hold an active fund but you actually or like a large Cap Fund but you might hold the risk of a small Cap Fund, you know, so I think obviously this will go down over time with so now Savvy is come up with certain policies, but I think still I think so risk is is quite consistent which I think know your is much better and secondly, you know, I think investors, you know, so people you know, what I've seen is that I would say 80 90 percent of the people today our focus a lot of a lot of the energy is is towards fun selection you my font selection. I mean they have to decide which one to buy which one to sell which one to John. Yeah, basically strategy they fear strategy rather than a look exactly absolutely most RGS know which this person will is fun. Give me more returns and had fun. And you know, how will I be the Benchmark by all that? But the reality is that you know, I think what what I think studies of numerous Studies have shown that actually long-term returns does not come from which fondue bio. It's actually come from the combination of those funds and that is called asset allocation, you know, so I think investors need to understand the need to a to have the nice the right combination which will so for example, a risk averse investor might have a higher data location. I will ask application. Whereas risk-loving investor, you know who wants to throw make more returns should ideally have more say made a small cap or whatever. So, I mean that is something what kind of allegation would you do predict so depends on the investor, you know the allocation no for your money like if you had to Do it for your money. What would your allocation is? So so in terms of my allocation, you know what I mean? I would definitely have so I have a long way to go. So I have maybe 30 40 year career in front of me. So I will definitely have I would say maybe 40 maybe 50 percent of money and and passive ones and the rest I would probably know during active funds or dead all of that. Yeah. So I think I mean currently, you know, I'll be honest. I mean most of our money is motor has active funds and the reason that is because you know, I think I am biased you know, and and and I know And I understand the group's philosophy and I am fully on board with it. And you know, I know for a fact that you know, I think active funds do well only problem is that most nurses don't have the mental capacity to hold onto and performs too long. So I think I definitely feel in terms of allocations. You know, the younger you are more passive the more risk-averse you are I would say more passive. So you have the Nifty 500 Index Fund you have the mid cap 150 and I see the small cap 250 Index right now. As far as my understanding goes the liquidity dries up maybe in the top 80 top hundred stocks right beyond that the liquidity starts starts to widen. So the bid-ask will widen and liquidity is a challenge. So how do you deal with that as a fun house? Like when money Flows In? How do you how do you actually replicate the index then here? So so I mean you're absolutely right the credit he does rap in India, and I think especially post say the 200 or 250 stock, you know. Is less liquidity than everything the top hundred stocks, but you know, I knew I mean if you look a little Nifty 500, you know, that is literally the One Fund that is that offers you Equity as an asset class, you know buying India's Equity is it's like buying gold buying a quitting would mean Nifty family because your by 96 97 percent of India's market cap. So I think and if you just look at the Nifty 500, you're actually buying 500 stocks, you know, 85 percent or eighty two and a half percent is actually the top hundred. Socks 15% is the mid cap and just like maybe less than 4% is a small-cap index. So the reason the so I think liquid is not challenged at all because you're basically buying because they're not equal exactly. And I mean I equal very index would be would be a huge challenge. That would be impossible not impossible that would be hard to scale up. But I think this is more of a market caps, I think because of the way the index is structured the top guys the guys with the most liquidity the most sizes get maximum sort of wages. So I think that so and we we don't want to be honest we've done we've done back-testing, you know, we've studied the liquidity before doing this and we also are experts and I think what we've seen is that you know, I think barring the small-cap index in all other indexes are actually, you know scalable with the small cap index, you know, obviously the liquidity the the top 50 stocks is is is guess if you had say or 5,000 or 6,000 crowdfund, but I think at our size today, I think we we do Don't have any problems number one and number two, you know, I think if you think about it, you know people have the same issues with the mid cap index 10 years ago. So I think hopefully the India India as as we go will become more liquid the demo trading activity really more investors Remo buying and selling. So I think if you account for all that certainly get back exactly learning it better. So I think we are like babysitting this from a bit of a medium to long-term sort of opportunity one more question about the mechanism of the fund house. Okay. So this is a question of how you actually manage the money. So let's Suppose there was this 2008 situation where suddenly you know, like there's a run on the bank. There's a run on particular find it. I hope it doesn't happen. But let's suppose it does and there are lots of redemptions, right? So how do you actually exit those stock especially towards the tail end, you know, the is that very difficult to do ya know? So so basically, you know, that's the beauty so I you know when you may think of passive funds yeah, there's to sort of formats one is the ETF in one is the index fund. Okay, and ETFs are something that you have to exit right away, you know, so if you get a sell order you have to execute next 15 minutes. Okay, whereas index funds, you know, you have a DNR half to sell all those all your security so, you know, so so so it's basically t plus 3 which is transaction day plus three days is when I have to return my money back to investors. Yeah. So in most I was in 99% of the cases, I will do it in the last half an hour of trading on which to get the end of the sort of price but in certain cases Like we also do the next day and you in terms of liquidity. I can give an example. So we have a ETF called The mid-cap Hundred ETF, which we've been running for the last eight years and we've had investors who had bought and sold, you know, a hundred and fifty a hundred hundred hundred 50 crore worth of stock like just like on one day and then buying organ under so I think we have seen the individuals or institutions design institutions crazy. Okay? Yeah, so we have seen that and we managed to and also we've learned from experience that so we have had good success in your experience. And so right now it's completely automated but but yeah, I think liquidity at the current sort of market cap that size the funds we have is only issue and I mean, we don't see an issue in terms of it because we have time for us to sort of call the inside this if it's completely automated this is really good business as well because not only are you saving money for the customer? I mean it almost costs nothing to actually run it right? That's that's pretty good. It's a win-win for yeah, so the Also automated almost automated I would say there is some small human intervention, but you are index funds are not yet because we sort of sell donning and and hopefully, you know this time next year we'll have sort of automated that but but also I think automation has its challenges because the idea is to lower the cost of trading as much as you can. So I think I my my plan is to not accept the current cost of automation is to lower it down. So hopefully we can make a models better and more efficient. Yeah. I think I experienced in Tech Will. Really help you. Yes. Yeah, exactly. Yeah. So I think we're running use has more technology as we can to lower the cost of trading because I think if you lower the cost of trading, you know, the all the benefits so are all the benefits actually goes to the investor not to us because all we'd stand to make is the expense ratio. Whereas everything else goes back to the investor. Yeah, cool. Okay. So let's do a little bit more active versus passive. So one of the heated debates are seen a lot s at least lately people are talking a lot about Ever since passive. So give me the lowdown what are people really fighting about? Is it the investment returns or is it just the difference in cost? I mean, what are they what's the debate really about? I think I think cost is not as big a big an issue as it is about returns, you know, I think investors. I mean if you think about it, no, there are higher cost funds or higher cost structures that are being sold today. And I think you know, the financial services industry is ideally a seller. Of Hope in the hope that you make a lot of money and which is why I think these are these make sense. Right? I mean you do most investors do end up making more money in like in stuff like private Equity or whatever. So I think it makes sense to charge more but I think people are today are more about the returned aspect and I think index is on something that most people sort of compare the Investments to and still I still think it's sort of our nation states today, but I think especially loss To four years, you know, you've seen that lot of active fund managers have not managed to sort of or actually in managed to outperform or The Benchmark which which is which is which is why you know, it's so the theory is that you know, if you cannot become The Benchmark then just by The Benchmark for free, right? So I think people are starting to ask question that you know, should I even give money or should I when you allocate some money to serve actor funds because number one I'm paying more number two. I'm not even getting the returns that I can do it for free or for very low cost so that Is a conversation and and that's the conversation that you know, people have been having globally for I don't know 20 30 years now and it still happens man named if they like the mutual fund industry today in the u.s. Is like 55% passive. You still have like, oh, I mean everyone still debating, you know, people are calling passive investing as a bubble people saying activeness doesn't work. So I think you know from what I know, you know, honestly, I don't don't want to even get into this active versus passive debate because I think that the I see it, you know passive as good as passive is there for Simplicity more than anything else? So the way the and don't know so much low and then choose choose what you like and Vixen. Yeah, exactly. That's exactly right. Yeah, so I don't know I'll be honest why to be supported polarize. Yeah. Yeah. So I think it sort of intellectuals and and and I do agree like, you know philosophically if it makes sense because the market tends to be so I mean the the underlying Theory too Why passive ones make sense is that you know Collective wisdom is better than individual wisdom, you know, so the market is a place where you have hundreds of thousands of people trying to look for Miss pricings trying to create Alpha and if you combine all of them, you know, and then it becomes very hard because all of them are undercutting each other they're fine mispricing the for all of that. So you as an individual, you know, trying to create that becomes very hard in a market where everything is priced in I think that's the philosophy. But you know, I think I'm which which makes perfect sense especially in a market like us where things are a lot more efficient, but I feel like in India. I think that efficiency is still not there yet. No, in my opinion, you know, so especially in like the small cap space or even mid cap or may be the last gasp as you know, there are opportunities where you could sort of, you know pick the right stocks all of that. So I think and and it also depends on size, you know, so managing a 10 grow portfolio was a hundred thousand or ten. Thousand crew portfolio is very different, you know, so your ability to be flexible is actually much easier in a tank reverses. And so I think I think and as we see mutual funds growing from say today 10 lakh crore in a um to 30 40 lakh crore, you know, it will get incrementally harder and harder of the few to deliver out performance or Alpha. I mean, whatever you call it. So the S&P indices versus active is a report called spear as you already know and it basically measures Performance of actively managed funds versus their S&P index benchmarks in India obviously has this partnership. So all the indices we have it says SNP diff teams, right? So it basically will compare Nifty. That's the Benchmark against the active fun. Now if you look at the scorecard and this is for our listeners, but you've obviously already knows and talks about this. If you go back as 2010 over 60 percent of funds, especially in the large cap category didn't beat the benchmark. That's the index. So the question to you predict is is picking a good active fund pretty much a coin toss or is there some skill involved? No, I think what we realize is that it is it is a bit of a coin toss and I think in addition to the coin toss, you know, I think people need to understand that, you know, even the guys who end up beating the Benchmark, you know will underperform because I think getting consistent outperformance in a fund is virtually impossible, you know, so funds will so suppose an active fund is doing Value strategy or a broad strategy and that strategy will work in a different different sort of a market, you know so value might work today, you know growth might do badly today, you know, so I think what we've learned is that you know, I think consistent Alpha is something that you know, you should never expect in a mutual fund. That is number one. Number two, I think you and there is there is credibility in a philosophy, you know, so I think if you look at active funds even though they might not be consistently underperforming and there will be like they go through Cycles where they will underperform. Today or from tomorrow will underperform again. So I think investors are looking to active funds should ideally expect them to know I think be really really sure about the philosophy of the fund manager about the fund house about what they're trying to do and they should ideally not look for returns, but look at their conviction of the fundamental philosophy, you know, so like like this people report, for example, you know, I I mean, obviously that's a great report. It talks about it tells you that know and honestly as PR report is also not completely right? There's no survive. Tobias so I'll give an example this Beaver report in the US says that you know, 90% of passive funds or active funds have underperformed the Benchmark. It's actually much more than that because a lot of funds have shut down or merged over the last 10 years. So the actual number is more like 1995-96 maybe who knows? Yeah, so so yeah, I think the u.s. Is is a is is I think that market is very efficient and even India, I think the efficiency is getting there, but but you know in my opinion I think investors Jurors should spend a little bit more time than just looking at three to five-year returns to be able to you know, like pick the right fund. All right the pain my joy, I think there is more to do more than that because you know, what we've seen is that three to five returns is not a very good metric to figure out the next three to five years. In fact, you know, it might be the opposite, you know, it might be that there's something that there's a term called mean reversion. Basically what it means is that the funds are end up doing really well. The last five years will most probably exactly we come back the mean we'll come back to the market rate. So I think investors need to sort of just be a little bit wary of that and make decisions accordingly. Wow, so good performing funds could just be a blip Eid use. I mean, there's cycle right the cycle for growth is like like the cycle for Value today cycle for Quality, right? If you'd hold if you had any of the top 10 stocks in your portfolio, or if you have a lot of cash, you know, if you take another call holding cash now your phone would have done well, so I think people do You understand go beyond this the returns to understand. What's happening. Yeah. Yeah. I'll a little bit more. I'm going to move away from this and talk about again as an AMC as a business because I really want to understand how the AMC also functions and I think the listeners also want to know so a lot of how Financial Services works is a lot of these products are sold by distributors or advisors, right? And they do a fantastic job. I mean they would go to each person. They would advise. It's just amazing, but one question I had is that Since index funds can't afford to pay high commissions. I mean, how will you actually grow this Market? How does that what's the strategy? Yeah. I mean that's yeah, so that's that's I think one of the sort of obstacles, you know for you to grow this business is that you know, you have to go direct to the customer and then yeah, absolutely. No, no, honestly, honestly, you know, I spent like I would say like 70 maybe 60 70 percent of my time just in education just going on. They're doing seminars trying to present about passive constant make you understand pass the funds are and how they can understand portfolio. So I think the education awareness is what I'm spending. I would say most of my time and the rest on like business see sort of a sort of stuff and I think I think the first barrier is number one education. The second barrier is ecosystem, which you pointed out know, which is I think how do you sell this stuff now because you can't go through intermediaries, you know, no one. I mean we we had so we've done an NFL For funds last month and we've had very little traction with Distributors because obviously the commission which is embedded like it makes sense. I mean, they should be paid for their work hard exactly. Exactly. Exactly. So, you know, I think the battle is number one, you know, so I am not. So anyway, as I said before Financial Services about, you know, like a lot about selling hope so in my case, you know in my case I am not giving commission and I'm not selling hope whereas an active fire there's commission and there's open. Make no money. So so I think there is there there are sort of two sides to this and but you know, I'll be honest I think as customers are getting smarter and smarter as customers are better at cooking stuff out and they are I would say, you know, I mean, I think I think there are so for example in our case, you know, I think the maximum optic happened in the retail investor sort of segments, which I think is very very encouraging. It's it mean it shows that you know, people are getting smarter people are getting more aware of the stuff of these products. Whereas I think hopefully over time, you know, we will get more participation from institutional or hir traditional that category. Yeah, you know, what'd be cool like in 2030 people listening to the podcast podcast. It's a damn man one. Lakh crore is is already a um under passive funds. It was just under a billion ten years ago. Yeah, that would be pretty interesting if that act. Yeah. Yeah. Yeah. I know. I know honestly it's going to happen here. I mean, I mean, I think there is like already we saying missing I think so. I think one big kicker or it is one big opportunity that we see at least with intermediaries is no upcoming. I think so what's happening India Today is a lot of Distributors who were traditional Distributors who's to know, basically get commission. So AMC is a now becoming investment advisors so fuel investment advisors. So basically what that means is that, you know, you're getting you're basically making or you're making your income by a charging a fee to your customer. So basically give you a customer directions and everything, but you're charging me. Money to the customer which I think which is you have to dominate like an advisory exactly advice video. So they know they're paying for this versus the absolute in so I think that's where I think you know, that's why I think I would say I see a lot of opportunity at least the intermediate space because someone who's paying fee understands the value of passive of what it can sort of the very can bring to your portfolio of a customer, you know, I don't have to worry about under performance and have to worry about imagine psychology of investor all of that. So I think that Trend will hopefully emerge, you know, I I mean, hopefully and that I think you're right. I think people will pay for 44 advice because when someone's investing like half their life savings they want good advice so I don't see why they wouldn't pay. But yeah something that's upcoming. You told you guys yes. Yes. Yeah, so that's that's a big driver earlier, but they give you mentioned something on smart meter earlier. Yes, you actually one of the first come first AMC's to actually launch a smart. Yeah fun. Yeah, which I don't think anyone did at that time. Yeah. So yeah. Sorry. He's sorry the question was so What type of a fund was it? And why did you close and also very quickly explain what smart meter means for our listeners? Yes. Yes. So small beta is is becoming or I think it has become a bit of a buzz word especially on India, but I think globally the so how smart meters different from shape so smart, but are still passive, you know, it comes under passive funds but the only difference is that you know, in in sort of low cost or simple passive funds your objective is to match the Benchmark or how the Benchmark as As closely as possible. So give you Benchmark returns. Whereas smart beta actually the Mandate is to have low cost but also the ability to be the Benchmark over time. So you get the best of both worlds, you know, you get so smart. We waited. Yeah, so smartly waited exactly a so basically would change the weight edges of the fund or you would choose a 20 or the 50 or 50 or of the hundred through some sort of algorithm or some automated trading strategy, but the idea is very simple is to be the benchmark. That's busy basement. Beetle came in you know, and and globally it hasn't worked. You know, I'll be honest smart meters a very interesting concept. I think it's a huge opportunity, but from our experience, you know, I mean, I remember telling you that, you know, we had customers calling us asking us how the fund manager is and I'll give you one other example, that knows why I know I knew actually a fund in the US or one of my friends who's working on a fund where Where you know they wanted to create this marketing strategy and the problem is that no the top two stocks that the smart meter strategy through up was like something equivalent to an indiabulls or DHL sort of a thing. So, you know, that is something that and and you can't really do something about it right when it happened. I mean, you can't change the strategy based on what it throws up. So I think that's why I think you know, I think small beta is definitely opportunity, but I think the education towards just pure passive funds is very less and once you know you A lot of people sort of adopting passive, then you can see people adopting smart beta but even then, you know, I think the AUM is mod beta are still quite low Global. Yeah. I mean also I was just thinking for the listener who's been listening for this for almost an hour now, I mean well done you got through this real use a little surprise. I know that's a Theatre that I have here. Like, I'm sure you want to know about ETFs. Yeah, I mean and at this that's why you've Got this for ya. If please explain if someone was yeah, I mean if you can if you can hang out from for maybe some more time, you know, I'm more than happy to talk to you in person. And now that's a huge it you got it. Yeah, I'll put my if someone wants to do this, can you explain how the core satellite portfolio works if I want to construct a portfolio with with with an index fund? How do I yes, I would refrain from telling someone to put all their money and pass the funds. Hundred percent, you know because I think India still early days and even though you have seen some bad performance Factor funds I would say, you know, I guess for the sake of this audience that's listening on the relatively younger folks looking to invest for a relatively long time. So have at least between 20 and 40 percent allocation two passes and they should be across categories. So if I think should be able to large-cap mid-cap I would say and then also again then obviously you can combine that with some active funds and some debt it but I think I think as the younger you are the less debt you should have in your portfolio. So don't have like 60 percent dead body person Equity that's have have basically like at least maybe 60 or 80 percent. I would recommend inequity. This is obviously I mean, this is obviously if you have if you do have short-term goals and please have more dead, but if you have if investing for a very long time and if you have the risk abilities and and and and if you know for a fact and you should know that you know, you will. The markets do correct on and off, you know every 7 to 10 years. So be prepared to lose maybe between 30 and 40 percent of your money, but obviously the pullback is very very short. So I'll give an example, you know, Mark is correct in 92 the markets pulled back very quickly. Then 99 the Y2K Marcus corrected in two years time 2000-2008 markets corrected in a year and a half thousand thirteen people just if we can just like manage their psychology, which I think is the most most difficult part of being an equity investor then I mean you will just absolutely do a great job. Number one. Number two. I think this is I think extremely important, you know, I keep telling a lot of younger younger folks is that the question that they asked me constantly is no when do I invest and you know, I think my response is very simple as early as possible, you know, if you can, you know, invest on the day you're born, you know, you know because because a I invest as always possible, you know, I think The beauty about compounding of power of compounding and that is something a brain human brain is not really doesn't have the job because of exponential's back exactly explain it that we don't have the brain capacity to understand the value of compounding and it is beautiful. I mean, I've seen it and all you do invest. So the money you invest today is going to double triple every single year in 15 to 20 years time every single year. So and the oh you invest the better it is you want so don't people ask me should I invest now? Should I force buy a car buy a house get married? Now I know don't know that invested a you know, I mess up I think even Buffett has this story, right? So they asked him when you started wrestling. Is it 12? He said what's your regret? I wish I started earlier so exactly so and and also, you know, if you've seen buffets income grow, you know as 60, you know, he was not very wealthy like but the compounding effect of his I mean 60 to 90, you know his wealth must have grown some hundred. I don't know how many X but that's what rights the more time you spend investing the more. The more that money is multiplying for you over time. So trick is actually this is maybe this is a bad example, right but I'm a huge fan of Bill Gates. Okay. I know he doesn't invest in equities, but this guy is not even running Microsoft and he's again on the rich list and he doesn't give a shit right now. He's just doing he just doesn't care and he just keeps getting really really because the machine that is Microsoft like it's exponential move has happened in the last 10 years, right and It's just it's beautiful. Yeah, exactly. So Microsoft corrected a lot, but then it's back now and I mean just look at his I mean he was wealthy in 20 years ago, and now in Juice because of pure compounding is again the wealthiest person so I think and what he's done he's done and and guess what? No, Bill Gates is actually sold a lot of us take one last 20 years. So Bill Gates would have been worth I think double of what these work today, but he's actually giving his money money away to philanthrophy. So I think despite giving out say I don't 20-30 percent was The way the last 20 years you still like the richest person. So I think that just shows you that you know doing nothing is the best strategy, you know my job as as as someone who knows something about mutual funds is very difficult because you know, I have to convince people to do nothing and and that's where most of my phone goes so which is why I think you know, if you really like stick to Investments and and don't like worried about the performance and you know, whether it be active or passive, it doesn't matter. What matters is that you hold onto whatever you have and yeah, it's just Is that correct? I think all disciplines. I think that's one thing we're taught I think in school is that if you work hard you'll get better marks but it's maybe just being really consistent for a really long time which in this case is not doing anything. Absolutely. Absolutely I am which is why I know I think people think that you know, investing is Magic and you know, you have to like a invest in these like only like wealthy people make money all that but know that all that is not true. What's a good stock to invest pratik? Please tell me yeah. Yeah. Yeah. Yeah, I wish I had known but I mean I would have not been on the spot cause if I know and I know so yeah, so there is there is no good stock. You know, I'll be honest people get lucky the and and I have rarely seen people create great wealth using stock stock tips, you know, well making creating wealth is an extremely boring process very boring. It takes forever. It was delayed gratification. And if you doing are you having fun? You're probably doing it wrong. So there is no stock tip according to me. I mean the guys selling you this talk. Tips exactly. What is so interesting the house always been pretty but yeah, so I agree I think stock tips are obviously so, you know, I mean most people do it because they have they like trading which is fine. But what I would tell investors at least like, you know have some Corpus that you trade with but have like maybe 80 90 percent of it that you invest for the long-term. That is that is a good I would say compromise so don't give up rating if you guys if people like to think that's fine, but don't let's like don't don't like But 90% in a vehicle where you can invest for a very long time and obviously then take about 10-15 percent and then that you can create with and see if you can make money there. Thanks for saying 90% cause I know inside you want to say hundred percent invest. Yeah, but thanks for say I mean, it's very hard to be idealistic I think but I think even even to a lot of I would say, well the origin are Triton eyes and I tell them that, you know, put most their portfolio in something as law something that is extremely long term and the rest, you know, you can invest in startups you can invest in structures, whatever. You want correct? But I would say don't like discipline for 90 and then obviously then you can you can maybe experiment with the rest. No, thank you so much for your time. That's a wrap or you can find with econ Twitter pretty koshwal. You can find us learn up on Twitter as well. You can find zero down line. Give us a shout out if you found this interesting. Thank you so much, but they could doing this. Yeah. Thanks a lot. This has been super fun. Thanks a lot. Mutual fund Investments are subject to Market risks read all scheme related documents carefully.
Index investing (passive investing) has become increasingly popular in the last decade across the world. Trillions of dollars have flown out of active mutual funds into low-cost index funds. But in India, these are still early days for indexing, we just have about Rs 7700 crores in index funds. Although Rs 1.6 lakh crores is invested in index exchange traded funds (ETFs), most of it from the Employees' Provident Fund Organisation (EPFO) and retail investors predominantly invest in index mutual funds. In the past few years, there has been small by steadily increasing chatter about the merits of low-cost index funds in India. Given the growing underperformance of actively managed large-cap funds, there also seems to be a growing realization that low-cost index funds may be the best way to get large-cap exposure. In the last few months, Motilal Mutual Fund has launched a suite of index funds tracking the Nifty 50, Nifty Next 50, Nifty Midcap 150, and Nifty Smallcap 250, and Nifty 500 indices. In this sweeping conversation with Pratik Oswal, Head - Passive Funds at Motilal Oswal Asset Management Company talks to Prateek Singh (Founder of LearnApp) about:    How he got started in finance   What are index funds and how do they work? The basics terminology of index funds   Impact and importance of costs when investing in mutual funds   His take on the active vs passive debate   Are index funds the best way to get large-cap exposure? Liquidity concerns in midcap and smallcap stocks   Growth of index funds in India   Scope of smart beta funds in India   Portfolio construction with index funds   Motilal's previous experiment with index funds  Note: The latest AUM in index funds is Rs 7717.16 crores. When the podcast was recorded it was just a little over Rs 6500 crores. 