1. Any index fund is also comprised of underlying stocks of companies which are in business.
2. And every business has so many tangibles and intangibles that all the known evaluation parameters and ratios cannot fathom them together all at the same time, even if creation of such an index fund is attempted.
3. Therefore, there will always be a "risk" from which Index/Exchange Traded Funds are also not immune.
4. Although the Efficient Market Hypothesis says that a market has all the information and the same is reflected in the price, it is not true for the stock market as not all players have all the information at the same time, which in turn leads to inefficiencies and this is also reflected in the price.
5. For instance, even a good company with a very good product, people and services, hence good evaluation ratios, may not be able to capitalize on all these winning factors to deliver good returns for its shareholders - may be it lagged in marketing or in delivery.
6. On the other hand, some mediocre companies may market its products well and deliver too, and reap in strong numbers that cheer the market.
7. So there could always be a case of a good company but not a very good stock.
8. Hence, savvy investors may adore a good company, but at times buy stocks of smart companies which can deliver returns.
9. We should, therefore, always bear in mind that any index or investment product cannot "fully mirror" the market cycle always and will pose a "risk" to that extent.
2. And every business has so many tangibles and intangibles that all the known evaluation parameters and ratios cannot fathom them together all at the same time, even if creation of such an index fund is attempted.
3. Therefore, there will always be a "risk" from which Index/Exchange Traded Funds are also not immune.
4. Although the Efficient Market Hypothesis says that a market has all the information and the same is reflected in the price, it is not true for the stock market as not all players have all the information at the same time, which in turn leads to inefficiencies and this is also reflected in the price.
5. For instance, even a good company with a very good product, people and services, hence good evaluation ratios, may not be able to capitalize on all these winning factors to deliver good returns for its shareholders - may be it lagged in marketing or in delivery.
6. On the other hand, some mediocre companies may market its products well and deliver too, and reap in strong numbers that cheer the market.
7. So there could always be a case of a good company but not a very good stock.
8. Hence, savvy investors may adore a good company, but at times buy stocks of smart companies which can deliver returns.
9. We should, therefore, always bear in mind that any index or investment product cannot "fully mirror" the market cycle always and will pose a "risk" to that extent.