Warren Buffet’s Legendary Advice on Index Funds May not Work in India

Warren Buffet is a well known investor and the owner of Berkshire Hathaway Inc is keen on suggesting index funds as an alternative over other kinds of investments like mutual fund, BSE, Sensex and Nifty. Though being a very legendary investor, Warren Buffet’s advice is worth listening but his idea over index funds may not work in India and here is why.

Why NO to Index Funds in India

People who invested in index funds have got lesser returns than any other kind of return investments like the mutual funds. This is what history has been suggesting over the years. An index fund follows the market or in other words it invests in index. The scheme here works in tandem to the index which can be BSE, Sensex or Nifty.

The management fee for index funds is comparably low with respect to other funds. Index fund is a low cost advantage fund and many big corporate have set up funds in the index. The major reason why index funds won’t work in India is because Indian market model is distributor oriented and there is very low attraction on it from the retail market as these are passive funds. Indian passive fund market is dominated by corporate flows whereas the US passive fund market attracts retail segment and has larger fan following.

Other report shows that the majority of open ended large cap, mid and small cap equity funds have beaten index funds over a return period of 1, 3 and 5 years. The other data shows that 86% of the time the large cap funds have beaten large cap index funds over a year of time while 78% of the times over a 3 and 5 years of rolling time.

This clearly shows that India is not the place where index funds will work and investing in other traditional markets is a better choice. The situation is different or opposite in United States as Index funds have 98% of the times beaten the normal market funds. Therefore it would be advisable to not follow the index funds advice given by the legendary Warren Buffet as the market of United States is completely opposite to India.