Index funds: Making inroads

What can Indian investors learn from John Bogle, the pioneer in index investing and founder of Vanguard, who passed away recently? There's no one who has done more for small investors than he has. He created a simple yet revolutionary product - the index fund. He took a torchlight and shined it on the one aspect of the fund industry that no one was focusing on - costs. That is a valuable legacy. What many don't talk about is that he was also a very thoughtful investor, as much as Buffett or anyone else. He had very strong views on mean reversion in the markets and paid a lot of attention to market cycles. He underlined that simple solutions are always better than complex ones. Compared to developed markets, the passive-fund industry in India is quite small, with index funds and ETFs managing less than 5 per cent of total assets. Why is this? Is it because Indian investors are ignorant of their benefits? Not really. The growth of the mutual fund industry in India has started only in the last 15 years or so. The experience everywhere in the world has been that the growth in mutual funds has kicked off only through active funds, with passive funds coming in much later. If you look at the history of US funds, John Bogle mentions in his interviews that when he started off his index funds, they were a flop. They didn't receive very large inflows for their first 15 or 16 years. I think you cannot compare the proportion of passive assets in India today straight away to those in the US because the two markets are in very different stages of evolution. In India, people are only now becoming aware of the benefits of equities and mutual funds and are beginning to look at financial planning. In the US market, until the dot-com era, passive investing was barely a blip on the radar. Index funds really started to take off there only after the dot-com crisis, when retirement money began to be allocated in a big way to passive funds. It is a matter of looking at