Zerodha's Nithin Kamath is championing low-cost index funds for greater wealth creation; but is he right?

/ 2 min read
Summary

For Kamath, attempts by investors to look for the 'best fund' or 'best asset class' is nothing but a wastage of time and energy. 

Zerodha CEO, Nithin Kamath
Zerodha CEO, Nithin Kamath | Credits: Nithin Kamath Instagram

'Set it and forget it' : analysts believe this formula to be one of the classic ideas of investing, especially when it comes to low-cost index funds, and then focusing on other things.

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And this is precisely what Zerodha's CEO Nithin Kamath advised on his social media handle X: "After 20+ years of being in the markets, one thing has become crystal clear to me: most investors should just invest in low-cost equity, debt, and gold index funds and do something useful with their lives."

For Kamath, attempts by investors to look for the 'best fund' or 'best asset class' is nothing but a wastage of time and energy. 

"What most investors don't realise is that they'd get far better returns by focusing on maximising their earning potential rather than obsessing over picking the "best stocks and funds." The odds are stacked against them anyway," wrote Kamath on X.

But what does Kamath actually mean?

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According to experts, a low-cost index fund can be a vital option for both novice and learned investors to invest in the stock market. Index funds can lessen your risks compared to investing in individual shares, and they are a practical choice if you want to minimise the time and money spent on investing.

For instance, one invests in equity markets by following either of the two investment strategies: active investing or passive investing.

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While active investing requires careful selection of stocks for the investment portfolio, passive investing, on the other hand, involves mirroring the benchmark index entirely.

When it comes to passive investing, fund managers have no discretion to invest outside the index constituents or deviate from the index weightings of different constituents. This process helps investors eliminate unsystematic risk from their investment plans.

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Now, what is unsystematic risk? It refers to the likelihood of making an incorrect selection for the investment portfolio. While investors can't invest directly in the benchmark indices, an index fund, which aims to replicate an underlying index, makes it convenient for them to have similar investment exposure.

Index funds use a passive investment approach to copy the performance of a particular stock market index by holding the same stocks in comparable proportions. For example: BSE Sensex or the Nifty 50 indices.  This way, the fund management charges are lower than those of active funds.

As a result, index funds serve as a low-cost investment choice that offers investors broader exposure to benchmark indices and have become a popular option for long-term growth.

Similarly, gold exchange-traded funds (ETFs) also follow a passive investment strategy, which is based on gold prices and invest in gold as an underlying asset.

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In this manner, index funds or gold ETFs offer affordable investments, and their diversification, combined with steady performance, makes them appealing for long-term growth among investors.

However, it is also imperative to understand that one should ideally invest in such funds by taking the help of a financial planner and allocate funds according to their financial goals.

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