Father Of The Index Funds, John Bogle transformed mutual funds | My Money Sage
Your mutual funds would not have generated the kind of returns you are getting if it weren’t for him. As mutual fund investors, we need to thank Bogle for helping us to get more from our mutual funds
John Bogle changed the mutual fund industry by reducing costs and helping investors to earn higher returns.He passed away on January 16, 2019, at the age of 89.
Your mutual funds would not have generated the kind of returns you are getting if it weren’t for him. As mutual fund investors, we need to thank Bogle for helping us to get more from our mutual funds.
Let’s take a closer look at John Bogle’s ideas and how he used them to provide higher returns to mutual fund investors:
How Bogle transformed the mutual fund industry
Bogle said that investors’ returns depend to a great extent on lower costs. He believed that it is not possible for fund managers to beat the market indices consistently. He put these ideas into practice at Vanguard, the mutual fund company that he founded.
Bogle’s ideas and the success of Vanguard have resulted in continuous efforts to reduce mutual fund costs across the world. Lower expenses have helped investors to earn higher returns.
Investors have realized that fund managers cannot outperform the markets consistently. As a result, low-cost, passively-managed index mutual funds and ETFs have become popular.Learn how to mange your money & create wealth, Download your FREE eBook now
Vanguard is the largest mutual fund company in the world
Bogle founded Vanguard in 1976. It was the first mutual fund in the world to offer low-cost index investing to individuals. Vanguard is a non-profit organization owned by the mutual funds it manages. These mutual funds are in turn owned by the people who put their money in them.
Today, Vanguard is the largest mutual fund company in the world, managing assets worth $5 trillion (around Rs.355 lakh crore). $5 trillion is a little more than the U.S. government’s budget and nearly 12 times the annual budget of the Indian government.
He made mutual fund investors rich
Another remarkable aspect of Bogle’s personality is that he didn’t set up Vanguard as a business venture owned by him. Vanguard is like a cooperative, and its profits go to the people who invest in it in the form of higher returns. In any other Wall Street company, the benefits would have gone to the investors.
Vanguard has made its investors richer, but it didn’t make Bogle very wealthy. He said that he was proud that he was not a billionaire. He was worth less than $100 million at the time of his death. Others who set up much smaller and less significant business ventures earned a lot more.
Bogle’s early days
Bogle understood the importance of money because he was born just before the start of the Great Depression in the United States. He published a paper titled ‘The Economic Role of the Investment Company’ at Princeton University. This paper became the foundation of his career and life. It urged mutual funds to cut sales and management fees and not claim to be superior to market averages.
This paper helped Bogle to land his first job with Wellington Management. He convinced the board to allow the mutual funds to own the company and run it at zero cost to benefit its investors. He named the company Vanguard and launched the Vanguard 500 Index Fund in December 1975, which was the first index fund in the world. Investors were not happy, and agents and distributors opposed him.
Also read: Benchmark & its importance in Mutual Funds
His ideas are still relevant today
Bogle’s desire to help investors instead of trying to accumulate wealth is unique in the competitive world of finance. Even though Bogle retired nearly 20 years ago, his ideas and Vanguard command unmatched respect in the financial world today.
Bogle’s ideas helped millions of investors to make more money, but as a result, the financial industry is earning lower profits. Both outcomes are welcome because of the way the financial sector has been functioning. Investors are getting the returns they deserve. The financial sector has also become more transparent and efficient.
Index investing in India
In India, actively-managed mutual funds have been outperforming passively-managed index funds. As a result, index funds and ETFs have not been popular. However, this may change because fund managers will have to show that they can keep beating the index.
The outperformance provided by fund managers is likely to become less common in the future due to the following reasons:
- SEBI’s categorization has made things transparent and forced mutual fund managers to stick to their mandate.
- SEBI has asked mutual funds to benchmark their performance against the total return index (TRI). The use of the TRI shows actual mutual fund performance.
- As markets become more efficient and transparent, there will be less room for fund managers to outperform the index.
Will index funds become more popular than actively-managed funds?
Index funds have not been popular in India because actively-managed funds have beaten their benchmarks. People prefer to invest in actively-managed funds because they outperform passively-managed index funds.
However, most actively-managed mutual funds were not able to beat the Nifty in 2018. Index funds and ETFs provided better results than most of the actively-managed funds. Time will tell if this trend will continue in the future.
It’s clear that index funds will gain ground, but actively-managed funds may provide better returns than the index for some more time.
We need to thank John Bogle for helping us to earn higher returns from our mutual funds. He said that investors’ return depends to a great extent on lower costs, and most fund managers could not beat market indices consistently. He put these ideas into practice at Vanguard, the mutual fund company that he founded. Passively-managed, low-cost index funds, and ETFs have become popular because of him.