Investment guru Warren Buffett gave advice to investors at the annual general body meeting of his company, Berkshire Hathaway. The advice was to invest in index funds to get the best return. Warren Buffett gave the advice citing the returns of an index fund based on the S&P 500, an index of the US stock market. Can this advice be applied in the Indian context?
Index Funds and Exchange Traded Funds (ETFs) are ideal investment products for those who want to gain by sticking to the stock index. Index funds and exchange traded funds invest in stocks that are included in the indices. There is a difference between ETFs and Index funds. While Indian index funds may focus on investing in equities, the weightage of stocks in the fund’s portfolio may not be equivalent to that of the index. The position of the fund manager can also influence the weightage. At the same time, ETFs will give the indexes an equal gain.
There are other differences. Index Funds are mutual fund products. At the same time ETFs are listed on the stock exchange. Their NAV (Net Asset Value) fluctuates depending on the market position at the time of stock trading. Investors can trade during these times. At the same time, the NAV of index funds, like other mutual fund products, will be announced after the close. In addition to investing in index-based stocks, there are also index funds that invest a fixed percentage of funds in other stocks selected by the manager.
Let us now turn to the advice given by Warren Buffett. The market conditions in India and the US are different. In India, mutual funds, which are actively managed by fund managers, outperform ETFs and index funds. The return of mutual funds based on the excellence of the portfolio management of the fund manager can make a big difference in the value of the investment in the long run.
Stock indices in India are limited in reflecting the overall performance of companies in the market as in the US. Therefore, the return on ETFs and Index Funds in India will be limited. At the same time, mutual funds that are actively managed by fund managers can outperform the index. Therefore, instead of opting for index funds and ETFs, it is advisable to invest in such equity funds.