Since long time ago, there has been a debate concerning which option would be better – active or passive portfolio management.
And as the both management styles get preponderence at different times, then we must not forget that usually the profitability of the leading indices is compared with that one of professional investors, managing funds for many years.
Recently, more and more often, it seems that there is something wrong, but not in Denmark, but in the indices of the BSE. The reason for this is that they definitely and seriously lag behind its regional competitors, without any fundamental reasons.
While the Romanian indices have came off the bottom by over 150%, then SOFIX, for example, increased hardly by 60%.
The reason is obvious – lack of capital inflows to your native stock exchange. However, this cannot remain unnoticed for a long by foreign speculators that drive international markets.
Besides, the benefits of your native indices are quite many. If they lag behind and are now relatively cheaper than its competitors, it would be possible to react in a much lesser extent to a larger downward correction in the global markets.
Also, it is quite possible for the next wave of growth in global markets, your native one again to be on top in its growth.
A certain question arises, what to do if we have the courage to re-invest in the local market with the perspective of the next three to five years.
A suitable answer that comes is – index funds, which unfortunately are not enough, but still available.
This kind of funds is very popular in all world markets, and this is not by chance. They take the side of passive investment with broad diversification, without the need of any particular knowledge and skills, which are not only gained for a lot of time and efforts, but often they do not work.
These funds make it possible to benefit from the indices increase with extremely low cost and without being loaded with fees and commissions management, charged by investment funds. And these fees can be a significant percentage of your profits.
Perhaps the biggest advantage of these funds, however, is the liquidity they provide to investors.
Liquidity is perhaps the greatest weakness of the stock market. It puts investors in uncomfortable situation, without being able to exit from a particular position (for example, in such where they have a greater number of shares), or having to come up with a compromise on the price that takes a serious part of their yields.
That liquidity seems to keep us at this stage beyond the sight of international institutional investors.
This kind of investment can be redeemed at any time, without considering the problem of liquidity (of course if it is not concerned a large percentage of the fund’s assets) and the problem of getting rid of the positions remains in the hands of the fund.
In these funds can be invested not so big amounts of money (for example 1000 dollars), with the possibility of broad diversification, which in other cases would be impossible to achieve with a similar amount.
They are suitable for investment with periodic addition of small amounts that do not alter the overall structure of the investment and do not require additional effort.
Finally, perhaps as a disadvantage but also as an opportunity for future financial institutions, we can point out the lack of such index funds in some countries.