Stocks , Indexes or Mutual Funds in India

[DesiGirl]

Hello Everyone,

I would love to hear your thoughts about best way to invest in Indian Market based on given data. If there was something close to Vanguard in India I would peacefully invest in broad market indexes and call it quits but here is what is available in India :

* There are some ETFs but liquidity is extremely low.
* The main indexes available are Sensex (30 largest stocks) , Nifty ( 50 largest across sector), there are broad market indexes (up to 500 but no real equivalent of VTSMX that I'm aware of). There are no Mutual funds tracking wide market indexes (200 or 500 stocks) , mostly they track Nifty or Sensex.
* Index funds have expense ratio > 1% and actively Managed Mutual funds 1.5-2% .

Now based on this data here are options available for me :
* Invest in Actively managed Equity Funds and make peace with high expense ratio, volatility in returns and lots of closet indexing (Most of them have 40-50% exposure to top 30-100 stocks. That is the current option.
* Invest in Index funds with extremely high expense ratio (for what they do) and pure large cap exposure.
* Invest into Indian Market through funds available in USA (specially Vanguard) haven't researched much but I would definitely be exposing myself to currency risk.
* Start with 5-10% of Stock portion based on AAP and try to directly invest in stock market -

- Try to create a folio of 20-30 stocks.
- Pick from subset of top 100-200 stocks initially.
- Look at parameters like ROE > 15% , PE < 15 , PB < 7-8 , High Dividend yield , so overall more geared towards value.
- As soon as buy a stock , put a stop loss limit of say 25% so cut my losses if things go wrong.

Based on how well or not well things go, I increase the active stock portion over next 2-5 years.

I have read most of the basic books like William Bernstein, Bogleheads, Random Walk down the Wall-street, value Investing etc. , have 15 years exposure to market (thru Mutual Funds) , lost **** load of Money in 2001 , have managed enough guts to buy on a 20-30-40% dip but still not much of Stock picking experience.

Please critique my plan as well as recommend books, resources, ideas to help. Currently Reading - Amazon.com: Damodaran on Valuation: Security Analysis for Investment and Corporate Finance (9780471751212): Aswath Damodaran: Books

Ultimately I'll be happy to get Market returns (12-15% in India over last 20-30 years based on whatever limited data we have) while saving 2% expense ratio, and hopefully limiting downside.

Thanks,
DesiGirl

 

[Rickt]

DesiGirl, have you checked out a few ETF's viz; INDY, PIN, INDA, SMIN, etc?
There are others as well but these ETFs are widely traded/owned. The India ETFs tend to be very volatile so fasten your seat belts and be prepared for a wild ride.
Cheers.

 

[DesiGirl]

Thanks Rickt .

This definitely helps in terms of getting exposure to Indian market at a lot cheaper expense ratio compared to what Indian mutual funds offer.

But taxation wise Equity MFs or Stocks are tax free after holding period > year in India but not the case in US. Definitely something to consider.

We are living in India we need some Indian exposure , do have 20% US Equity exposure. In India returns as well as volatility is higher and there is also factor of Exchange rate. (Most off our expenses being in Indian Rupees)

Regards,
DesiGirl

 

[Animorph]

I wouldn't let limited liquidity rule out ETF's, though my idea of limited might be optimistic in your case. I have accounted for up to 10% of an ETF's volume in a day, but still traded inside the bid/ask spread or better using limit orders. Maybe not something you want to do all the time though.

I use both active and index funds. I'd try to use the index funds where you can. But if you can find an active fund that performs well and is either more diversified or covers a market segment that diversifies your portfolio I'd use it.

Individual stocks were a lot of work. I gave up on them after a few years. Especially when I wanted to add more international equities.

Will you diversify internationally as well? Same sort of options there?

 

[DesiGirl]

Thanks Animorph.

When I mention liquidity we are looking at difference of 1000-10,000 crore active Mutual funds vs. < 100 crore for ETFs.

In India lots of active funds beat (supposedly) indexes because many times indexes are just a casual after thought and they don't necessarily stay true so its hard to truly check the performance. Having said that Small cap funds are definitely worth it because it is lot of work to track lots of small & microcap companies ( Some times Cap of $25-50 Million only) and I can't hope to do a OK job.

But its the Large Cap where Most of funds end up holding INFY , SBI , REL , TATAMOT etc. where I think may be I can do my own indexing and any basic value criteria should get better results and save the expenses (Since I may still have 30 years of investing left).

As far as international exposure goes, one fund house has just started some US based scheme but we have 20% of total AAP in US Equities through 401K ( VIVAX, Russel small cap, Artisan Midcap - governed by choices available).

Regards,
DesiGirl

 

[shapil]

If you can spend time and enjoy the process then pick your stocks and create your own demat portfolio. This is what I do.

Sent from my Galaxy Nexus using Tapatalk

 

[DesiGirl]

Thanks for your response Shapil.

Would you like to share some pointers about how you choose the stocks, resources you use or things to keep in mind. I'm assuming you are long term Investor and not a day-trader (That is not my cup of tea

Regards,
DesiGirl