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Cheap, Passive and Huge

America’s Vanguard is a unique fund company--focussed on low-costs, passively-managed funds and owned by investors. Does its massive growth hold any lessons for us?

According to news reports, the US mutual fund, The Vanguard Group has had total inflows of USD 130.4 billion till date this year. This is the highest for any mutual fund ever. To put this number into perspective, it’s of the same scale as the total size of the assets managed by entire Indian mutual funds business. The previous record was the marginally lower USD 129.6 billion that JP Morgan took in in 2008.

However, the significance of this goes far deeper than the hair’s breadth by which the record has been beaten. JP Morgan is just another Wall Street firm, albeit very large; but Vanguard is unique in the entire world of mutual funds. Vanguard is the pioneer and the champion of low cost index investing. It was founded 37 years ago by John C. Bogle, the father of index investing. Index investing is a type of investment management in which there’s no fund manager who takes investment decisions. Instead, the fund’s investments replicate an index.

But even more important is Vanguard’s ownership structure. The fund company is owned by the investors in its funds themselves. Conceptually, this is closer in spirit to a co-operative than a for-profit corporation. Vanguard’s costs of managing its investors money is stunningly low, about 0.2 per cent per annum. This is a fraction of what even others with similar funds charge.

However, the rise of Vanguard is not just about low-cost. If it offered low cost and poor returns, then there would have been nothing to this story. However, coupled with Vanguard’s low cost has been the general inability of (expensive) actively-managed funds to consistently beat the market indices and funds based on them.

Does the Vanguard story hold any portends for India? Index investing hasn’t yet arrived in India, but it’s day might be on its way. Historically, Indian actively managed funds have beaten the indices comfortably but this margin has been steadily narrowing while costs are actually rising. Perhaps, there’s a Vanguard in our future as well.