Sensex, Nifty on the dance floor — should you simply invest in index funds and relax? Here is what experts say

Broader benchmark indices Sensex and Nifty spiked nearly 18.74 per cent and 20.03 per cent respectively in 2023. The market continued its gaining spree for the eighth year in a row.

Vimal Chander Joshi
First Published10 Apr 2024, 08:26 PM IST
In fiscal year 2024, the Nifty posted a 30 per cent return.
In fiscal year 2024, the Nifty posted a 30 per cent return.

The Sensex closed above the 75,000 mark for the first time on Wednesday, April 10. The NSE Nifty50 index has touched the 22,700 mark. The benchmark indices Sensex and Nifty have soared around 18.74 per cent and 20.03 per cent respectively during the Calendar Year 2023

In fiscal 2024, the Nifty posted a 30 per cent return. With such exemplary returns posted by the benchmark indices, is it rational to simply toe their line instead of investing in active schemes in a bid to ‘beat the benchmark’?

Random walk around D-street

Several theories and books are written on the ‘efficient market hypothesis’, which implies that markets are efficient, leaving barely any room to make excess profits by investing.

The bestselling book ‘A Random Walk Down Wall Street’, written by Princeton University economist Burton Gordon Malkiel, also propagates this theory, which says that consistently beating the market is quite hard for anyone. 

Legendary investor Warren Buffett remarked in February 2019 that he had a tough time trying to beat the S&P 500. In the same interview, he further mentioned that his two investing gurus, Ted Weschler and Todd Combs, have both underperformed the benchmark index during the past few years by a “tiny bit.”

So, it is not an exaggeration to say that nobody — simply nobody — can beat the market forever, not even Warren Buffett.

Weather volatility

We spoke to a few experts to get their views on the impact of investing only in index funds. They argue that index funds enable investors to weather volatility in the market and one can avoid risking too much by investing in active mutual funds.

“The decision to stay invested in index funds hinges on the broader asset allocation strategy. Given that index funds lack the ability to hold cash or adopt defensive stances, investors remain vulnerable to downturns in performance. Yet, if index fund allocation aligns with an overarching defensive asset allocation strategy, the portfolio may be better equipped to weather shifts in market sentiment. Conversely, if the asset allocation leans aggressively, it might be prudent to reduce exposure to index funds,” says Alekh Yadav, Head of Investment Products, Sanctum Wealth.

However, Amol Joshi, Founder of Plan Rupee Financial Services, says that there is no relation between the high returns posted by the BSE Sensex and the Nifty50 in the past one year, and their ability to post similar returns in the future. 

Moreover, when benchmark index funds have given a 25 per cent return, some active schemes have given even higher, Joshi added. 

While cautioning retail investors, Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, says, “Retail investors should always keep in mind that whatever the market level, they should keep on investing as per their asset allocation set on the lines of their long term financial goal. As far as the construction of an equity portfolio is concerned, having index funds in your core portfolio is beneficial in the bull market. Low-cost index funds save your management costs and reduce undue risk in the portfolio by investing in the top 50 good-quality stocks.”

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First Published:10 Apr 2024, 08:26 PM IST
HomeMoneyPersonal FinanceSensex, Nifty on the dance floor — should you simply invest in index funds and relax? Here is what experts say

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