WHY INDEX FUNDS OFTEN WIN?
Most active large- and mid-cap funds have lagged their benchmarks over the past decade.
Doshi outlines three reasons:
Costs compound against investors
Active funds charge 1.5–2% annually versus 0.5–1% for index funds. That gap may seem small, but over long horizons it becomes decisive.
On a ₹1 crore investment earning 12% gross annually, active fees can leave the investor with roughly ₹7 crore after 20 years, compared to around ₹8 crore through low-cost passive exposure.
“Fees alone can erase nearly a crore over two decades,” Doshi points out.
Market efficiency limits alpha
In widely-researched large- and mid-cap segments, information flows quickly, reducing the scope for any manager to consistently beat the index after costs.
Many managers end up adjusting styles to defend near-term performance, further diluting their ability to generate durable alpha.
Passive strategies have grown more sophisticated
Smart beta products — factor-driven, rules-based, and low-cost — now sit between pure passive and traditional active funds. They offer diversification, transparency, and systematised alpha potential without the risks tied to individual manager decisions.
For most new investors, Doshi says, index or smart beta strategies offer clearer odds and fewer moving parts. Active funds still matter in specialised pockets — such as small caps, global equities and thematic ideas — where inefficiencies remain meaningful.
How investors should balance short- and long-term goals?
Doshi stresses that the biggest driver of long-term outcomes is asset allocation, not fund picking.
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Matching asset classes to time horizons is the anchor.
For short-term goals (<2 years), capital preservation comes first. A mix like 70% debt, 15% equity (large-cap tilt), 10% gold offers stability with limited growth participation.
For medium-term goals (2–5 years), blending becomes essential. With most five-year Nifty 50 TRI periods historically delivering 7%+ returns, a 50% equity, 30% debt, 20% gold balance captures upside while cushioning volatility.
Doshi notes that equity and gold show near-zero long-term correlation — making them natural stabilisers for each other.
For long-term goals (7+ years), time reduces risk sharply. Nifty 50 TRI has not produced a negative rolling seven-year return in data studied. A 70% equity, 15% debt, 15% gold mix delivered lower drawdowns and better risk-adjusted returns than pure equity in backtests.
Incorporating mid and small caps, and even REITs/InvITs within the remaining allocation, can deepen diversification further.
Asset class leadership rotates unpredictably — gold led nine of the past 16 calendar years, equity five, debt two — stressing why multi-asset blends capture returns across cycles rather than chase past winners.
How to decide when to switch funds?
Doshi calls fund switching “far more damaging than most investors realise,” especially when driven by recency bias.
He suggests a disciplined filter.
- Evaluate performance for consistency, not short-term moves. One poor year rarely justifies a switch; repeated underperformance across rolling periods warrants scrutiny.
- Check for style drift. If a fund departs from its stated mandate — such as a large-cap value fund shifting into mid-cap momentum names —the original investment thesis no longer holds.
- Assess manager changes. A key fund manager’s exit can materially alter the fund’s character. This calls for review, even if the new team has strong credentials.
- Reassess when your own circumstances change. A shorter goal horizon, lower risk appetite or changed tax situation can make an existing fund unsuitable.
- Watch for structural changes. Benchmark shifts, mergers or fundamental strategy revisions are valid reasons to reconsider holding the fund.
- Monitor concentration risks. Unusually high exposure to a few stocks or illiquid names increases downside vulnerability and may justify exiting.
Doshi warns that most switches happen at market lows — when investors lose confidence just before performance rebounds. Clear, rule-based triggers help prevent emotional decisions and protect compounding.
Why understanding risk profiles is non-negotiable
Doshi says risk characteristics — not returns — determine whether an investor can stay invested through difficult periods. Volatility, drawdowns, recovery time, liquidity and concentration risks all shape the portfolio experience.
Risk-adjusted metrics such as Sharpe and Sortino ratios help compare funds meaningfully. A fund with slightly lower returns but materially lower volatility may offer better long-term efficiency and a smoother ride.
Liquidity risk — particularly in small-cap funds or lower-rated debt — needs close attention as it affects exit ability during stress.
“Funds that control downside and recover quickly help preserve discipline and compounding,” Doshi says. Aligning a fund’s risk profile with one’s emotional and financial capacity is essential before allocating significant capital.
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