Investing ain't easy

Lately, many people have been asking me about investing in India and it got me thinking about investing in general.

I’ve realized that it’s very tough to beat the index year over year, this image (although dated) shows what i mean. I’ve read that many managers under perform the indexes, but I recently saw the concrete data in the iShares marketing packet (pdf file). It shows that over a ten year period, 96% of ALL large cap fund managers under performed the index. As they say, if you can beat them, join them.

So how do you invest in an index fund? Their is a whole industry around this called ETF’s – exchange traded funds. They basically buy the stocks that compose a certain index and wrap it into a nice tradable vehicle. The expenses (or impact) costs are low since there really is no overpaid fund manager to compensate. And since they are not actively buying and selling you don’t get hit with capital gain taxes as you do with a mutual fund. Some of the bigger players in the ETF space are State Street Global Advisors (with their SPDR products), Rydex Investments and Barclays with their iShares and iPath products.

This brings me back to investing in India. This whole ETF discussion came about when I started to look at various ways for investors to access the Indian markets. The following are several ways:

1. Buy ADR’s
2. Mutual funds that target India (Morgan Stanley India Fund or the Blackstone India Fund)
3. Indian focused hedge funds
4. ETF’s – right now iPath is the only one, many more will be coming soon

Take the Blackstone fund for example, in 2006 it returned an average of 43.9% which sounds great but when you compare it to the Sensex benchmark which did 46.32% for the same period it ain’t so hot.

There is an article in today’s (July 25th) business section of DNA (a Mumbai newspaper), that talks about the performance of Indian mutual funds and how lame they are. One of their stats shows that 88% of all equity diversified funds underperformed the Sensex for 2006.

Bottomline, I’m not sure what the value is in paying a money manager to under perform the index.