October 2012

How do you compare and evaluate Mutual Fund Performance

 Risk-adjusted Returns, Evaluating Mutual Fund Performance, Sharpe Ratio, Treynor Ratio, Beta, Alpha, tracking error, Index funds, .

Risk-Adjusted Return is one of the concept investors should be aware when comparing returns of mutual funds.  

One way of comparing the returns between two different funds is to look at the their relative returns over a period. However, a weakness of this approach is that it does not differentiate between two schemes that have assumed different levels of risk in pursuit of the same investment objective.

It is possible that although two schemes share the benchmark, their risk levels will differ, and sometimes quite dramatically as well. Evaluating performance, purely based on relative returns, may be unfair towards the fund manager who has taken lower risk but generated the same return as a peer.

An alternative approach to evaluating the performance of the fund manager is through the risk reward relationship.

The underlying principle is that return ought to be commensurate with the risk taken.

A fund manager, who has taken higher risk, ought to earn a better return to justify the risk taken. A fund manager who has earned a lower return may be able to justify it through the lower risk taken. Such evaluations are conducted through Risk-adjusted Returns.

There are various measures of risk-adjusted returns. We’ll look at the three most commonly used :

Sharpe Ratio

An investor can invest with the government, and earn a risk-free rate of return (Rf). T-Bill index is a good measure of this risk-free return.

Through investment in a scheme, a risk is taken, and a return earned (Rs).

The difference between the two returns i.e. Rs – Rf is called risk premium. It is like a premium that the investor has earned for the risk taken, as compared to government’s risk-free return.

This risk premium is to be compared with the risk taken. Sharpe Ratio uses Standard Deviation as a measure of risk. It is calculated as

(Rs minus Rf) ÷ Standard Deviation

Thus, if risk free return is 5%, and a scheme with standard deviation of 0.5 earned a return of 7%, its Sharpe Ratio would be (7% – 5%) ÷ 0.5 i.e. 4%.

Sharpe Ratio is effectively the risk premium per unit of risk. Higher the Sharpe Ratio, better the scheme is considered to be. Care should be taken to do Sharpe Ratio comparisons between comparable schemes. For example, Sharpe Ratio of an equity scheme is not to be compared with the Sharpe Ratio of a debt scheme.

Treynor Ratio

Like Sharpe Ratio, Treynor Ratio too is a risk premium per unit of risk.

Computation of risk premium is the same as was done for the Sharpe Ratio. However, for risk, Treynor Ratio uses Beta.

Treynor Ratio is thus calculated as: (Rf minus Rs) ÷ Beta

Thus, if risk free return is 5%, and a scheme with Beta of 1.2 earned a return of 8%, its Treynor Ratio would be (8% – 5%) ÷ 1.2 i.e. 2.5%.

Higher the Treynor Ratio, better the scheme is considered to be. Since the concept of Beta is more relevant for diversified equity schemes, Treynor Ratio comparisons should ideally be restricted to such schemes.


The Beta of the market, by definition is 1. An index scheme mirrors the index. Therefore, the index scheme too would have a Beta of 1, and it ought to earn the same return as the market. The difference between an index fund’s return and the market return, as seen earlier, is the tracking error.

Non-index schemes too would have a level of return which is in line with its higher or lower beta as compared to the market. Let us call this the optimal return.

The difference between a scheme’s actual return and its optimal return is its Alpha – a measure of the fund manager’s performance. Positive alpha is indicative of out-performance by the fund manager; negative alpha might indicate under- performance.

Since the concept of Beta is more relevant for diversified equity schemes, Alpha should ideally be evaluated only for such schemes.

These quantitative measures are based on historical performance, which may or may not be replicated.

Such quantitative measures are useful pointers. However, blind belief in these measures, without an understanding of the underlying factors, is dangerous. While the calculations are arithmetic – they can be done by a novice; scheme evaluation is an art – the job of an expert. 

Source : NISM
More on Mutual Funds

How are Mutual Fund Gains Taxed?

Capital Gains Tax, Equity Mutual Funds, Debt Mutual Funds, Indexation Benefits, FMP's, Balanced Mutual Funds.

Capital Gain is the difference between sale price and acquisition cost of the investment. Since mutual funds are exempt from tax, the schemes do not pay a tax on the capital gains they earn.

Investors in mutual fund schemes however need to pay a tax on their capital gains as follows:

Equity-oriented schemes

– Nil – on Long Term Capital Gains (i.e. if investment was held for more than a year) arising out of transactions, where STT has been paid

– 15% plus surcharge plus education cess – on Short Term Capital Gains (i.e. if investment was held for 1 year or less) arising out of transactions, where STT has been paid

– Where STT is not paid, the taxation is similar to debt-oriented schemes

Debt-oriented schemes

– Short Term Capital Gains (i.e. if investment was held for 1 year or less) are added to the income of the investor. Thus, they get taxed as per the tax slabs applicable. An investor whose income is above that prescribed for 20% taxation would end up bearing tax at 30%. Investors in lower tax slabs would bear tax at lower rates. Thus, what is applicable is the marginal rate of tax of the investor.

– In the case of Long Term Capital Gain (i.e. if investment was held for more than 1 year), investor pays tax at the lower of the following:

— 10% plus surcharge plus education cess, without indexation

— 20% plus surcharge plus education cess, with indexation

Indexation means that the cost of acquisition is adjusted upwards to reflect the impact of inflation. The government comes out with an index number for every financial year to facilitate this calculation.

For example, if the investor bought units of a debt-oriented mutual fund scheme at Rs 10 and sold them at Rs 15, after a period of over a year. Assume the government’s inflation index number was 400 for the year in which the units were bought; and 440 for the year in which the units were sold. The investor would need to pay tax on the lower of the following:

— 10%, without indexation viz. 10% X (Rs 15 minus Rs 10) i.e. Rs 0.50 per unit

— 20%, with indexation.

Indexed cost of acquisition is Rs 10 X 440 ÷ 400 i.e. Rs11. The capital gains post indexation is Rs 15 minus Rs 11 i.e. Rs 4 per unit. 20% tax on this would mean a tax of Rs 0.80 per unit.The investor would pay the lower of the two taxes i.e. Rs0.50 per unit.

Here’s how different funds are taxed and who should invest in them:

Debt schemes held for short term: If you fall under 10% tax bracket, growth option would be better—as there is no DDT (13.519%). Dividend option is better if an individual falls under higher income brackets (20% or 30% & above) as the DDT is lower. Debt schemes if held for short term ( less than one year), then capital gains tax will added to income and taxed according to the slab.

Debt funds held for long term: If you want to invest in debt schemes for more than a year, growth option is a better choice. In case of debt schemes, long term capital gains are taxed at 10% without indexation and 20% with indexation.

This article – Guide to debt funds & article – Debt funds can prove beneficial from Economic times further articulates the tax advantages & other benefits of investing in debt funds. 

Source : NISM

 More on Mutual Funds

August 2012

Mutual Funds and the associated charges

Mutual Funds, AMC Charges, Entry Load, Exit Load, India's Top Mutual Funds, Debt funds, FMC, Equity Funds, Hybrid Funds, Balanced FundsThere is a lot of talk of revamping the Mutual Fund Business in India which has taken a serious downfall over the past few years, ever since the entry load was banned ~ which forced the distributors to literally run away from the business. IN the coming few months, there might be some changes like bringing in some entry load,providing additional tax benefits, incentives for promoting mutual fund business in Tier II cities, providing a common AMFI platform to provide a seamless tracking system etc.

Here is a list of the charges which one should be aware when buying a mutual fund :

Mutual funds are an excellent route to create wealth for yourself. However, they do not come cheap. They have some charges. Some visible, some invisible. You need to be aware of the charges, that is all. Let us look at some of the charges:

1. Entry load: this is charged to pay the distributor for the sales effort that he/she puts in to make the sale. Normally this is nil for debt funds and about 2% for equity funds. (At present there are no entry load charges in Mutual Funds)

2. Brokerage paid for buying and selling of shares – this is a hidden charge because it gets adjusted in the NAV – the net asset value, and you only see the net sale/ purchase. However, as is evident, a fund with a higher churn – a lot of buy and sell transactions – pays a higher cost. It hurts and hurts bad.

3. Chargeable costs: the fund house is allowed to charge some expenses – like audit fees, trusteeship fees, custodian charges, mandatory communication expenses, marketing expenses, etc. The limit here is 2.5% p.a. This is charged on the market value of the assets and hurts – especially when the fund does well

4. Trail commission: In order to encourage distributors from keeping the assets in one amc, amcs pay a trail fee – and this is part of the allowable expense – and thus comes out of the Nav. It is not clear what happens to the money that comes in as “direct” and on which there is no “entry load”. Think about this. God bless you.

5. Charges: The total costs of running an equity fund in India may be high or low by international rates. Do you know how much you are paying – well you are paying about 2.15% per annum. This includes all expenses – allowed by SEBI. If you think debt funds charge less, well you are mistaken. They charge about 1.25%. You will find Templeton India Income Builder charging about 2.15%. You like it? Well, lump it.

Source : Subramoney.com

Mutual Fun Investments: SEBI relaxes KYC norms

KYC, Mutual Funds, Investments, Stock Market, India, Entry Load, PAN requirement, 50000 investments

In January 01, 2011 Know Your Customer (KYC) had become mandatory for all investments irrespective of the size of the investments.

Capital market regulator SEBI has decided to exempt the requirement of permanent account number (PAN) for investments up to Rs 50,000 in each AMC. The rule is applicable with immediate effect (Aug 09 2012)

Investors can now investment up to Rs 50,000 annually in a single AMC without a permanent account number (PAN).

This is a welcome change for the the MF industry which is facing tremendous pressure due to a slack stock market over the past few years and also the disinterest in the distributors towards MF.

Top 15 stock holdings by mutual fund schemes (by market Value) in India

Top 15 stock holdings by mutual fund schemes (by market Value) in India as on May 31, 2012

Company Name

No of Shares

Market Value (Cr.)

ICICI Bank Ltd.



HDFC Bank Ltd.



Infosys Ltd.



Reliance Industries Ltd.



Bharti Airtel Ltd.



State Bank Of India



Oil & Natural Gas Corpn. Ltd.



Tata Consultancy Services Ltd.



Housing Development Finance Corporation Ltd.



Bharat Petroleum Corpn. Ltd.



Larsen & Toubro Ltd.



Power Grid Corpn. Of India Ltd.



Dr Reddys Laboratories Ltd.



Hindustan Unilever Ltd.



ITC Ltd.



The above data is as of May 31 2012. The stocks are held across various mutual fund schemes. Small retail investors always look out for Blue Chips… The above stocks are certainly the favorites among the fund managers. If the compilation were for 20 stocks, then the following stocks make the list as well : Coal India, Mahindra and Mahindra, Axis Bank, Tata Motors & Bajaj Auto.

September 2010

Top Performing Balanced Mutual Funds

Top Performing Balanced Mutual Funds, India, .

I was looking up for good Balanced Funds to help a friend and thought of putting this up for my own reference.

Balanced mutual funds invest in both equity and debt. Here is the list of some of the good – balanced mutual funds in India, based on the 5 year returns.

Balanced mutual funds are treated as equity funds for tax purposes when the fund allocates at least 65% into equities on an annual average fund amount.

There are various kinds of  Mutual funds for Investors to choose from. Balanced Mutual Funds is one category where there is a mix of Equities and Debt. These mutual funds take care of the asset allocation between equities and debt for the Investor.

Fund 5 Year Return (%) Inception Date Expense Ratio
HDFC Prudence 17.02 Jan-94 1.82%
HDFC Children’s Gift-Inv 12.08 Feb-01 2.10%
HDFC Balanced 13.7 Aug-00 2.15%
Reliance Regular Savings Balanced 16.06 May-05 2.22%
Birla Sun Life 95 15.54 Feb-95 2.33%
Canara Robeco Balance 11.57 Jan-93 2.39%
DSPBR Balanced 14.13 May-99 2.08%
Tata Balanced 12.75 Oct-95 2.50%
FT India Balanced 11.85 Dec-99 2.35%
Principal Conservative Growth 13.32 Aug-01 2.50%

(Source: Valueresearchonline.com)

August 2010

What is Mutual Fund Service System (MFSS)

Mutual Fund Service System (MFSS) is a new online order collection system (to be noted, not live trading of MF….) for placing subscription or redemption orders on the Mutual funds based on orders received from the investors.  This has been implemented by the both Exchanges, NSE and BSE.

MFSS Eligibility criteria for Investors:

One should have a Depository and Trading account with a Broker and should also sign the relevant  agreements for MFSS.

Investors already having a Demat account :  Will have to sign additional terms and conditions for MFSS in order to activate this facility in addition to the existing equity account.

This is how the system works:

You can buy or sell Mutual Funds using the MFSS system (the same way in which you buy or sell shares). MFSS is available between 9.00 am and 3.00 pm on all the working days of the Exchange.  All are  settlement happens on T+1 (working days). (Trade Date + 1 working day)

An order confirmation slip is sent to the investor by the Broker and is the conclusive evidence of the transaction.

The pay-in of funds for subscription shall be through the Broker’s Clearing Bank Account but Pay-out of funds (redemption proceeds) will be directly sent by RTA to investors through appropriate payment mode such as direct credit, NEFT or cheque as decided by AMC from time to time, as per the bank account details recorded with the RTA.

As of now, SIP/STP/SWP is not available in MFSS. ( I am not sure how this can be implemented… Will have to wait and watch)

Please note that all other scheme characteristics mentioned in the KIM remain the same.

Conversion of Existing Mutual Funds into Demat :

The following needs to be done

1. You need to Collect Conversion Request Form(CRF) from your broker, duly fill it up and submit along with latest Statement of Account evidencing the holding of MF units.

2. You need to Ensure name and pattern of holding of your account are same as in the Statement of Account.

3. You might be required to use separate CRF is required for each folio number, free units and for locked-in units

4. You need to Ensure from your broker (or you can refer to the list below)  that the MF units submitted for conversion is eligible to be held in demat and ISIN is allotted.

5. Your Broker might charge you a minimal amount to get the Mutual fund units converted into demat.

Advantages of MFSS : Convenience !!!!!! All equity related assets are in one place. It is easier monitor. Easy to transact.

Disadvantages of MFSS : Costs !!!!!! Brokerage Costs may be involved when buying or selling mutual funds through demat.  At present there are no entry and exit loads on equity mutual funds. (Please talk to your broker for more information,  most of the brokers are offering free transactions costs for couple of months )

Funds List of Schemes of following AMCs are eligible in MFSS. Please find the attached excel file containing the eligible scheme list of various Asset Management Companies (AMCs).

List of Eligible scheme for MFSS (Refer latest NSE Circular for updated list)
AIG Global Asset Management Company (India) Private Limited
Benchmark Asset Management Company Private Limited
Birla Sun Life Asset Management Company Limited
DSP Blackrock Investment Managers Private Limited
FIL Fund Management Pvt. Ltd.
Franklin Templeton Asset Management India Pvt Ltd.
HDFC Asset Management Company Ltd
ICICI Prudential Asset Management Company
IDFC Asset Management Company Ltd.
JP Morgan Asset Management India Private Limited
Kotak Mahindra Asset Management Company Ltd.
Morgan Stanley Investment Management Private Ltd.
Principal PNB Asset Management Company Pvt. Ltd.
Quantum Asset Management Company Pvt. Ltd.
Reliance Capital Asset Management Ltd.
Religare Asset Management Company Ltd.
SBI Funds Management Pvt. Ltd.
Sundaram BNP Paribas Asset Management Company Limited
Tata Asset Management Ltd.
UTI Asset Management Company Ltd.

July 2010

The Simple rules to Successful Investing – Part 1

The Simple rules to Successful Investing , Understanding Investing, Stocks, Mutual Funds, Tax, Insurance, Estate, Wills.

“No amount of talking or reading can teach you swimming. You will have to get in the water.”

There are these little general rules which are applicable and useful for decision making and taking actions. And these simple rules are applicable in so many aspects of life, they are just some small reminders, some common-sense stuff which are really useful.

And yes most of them are applicable in investment planning as well.

a. Perfect Plan – Forget it.There is no such thing as a perfect investment plan and no such thing as a perfect time. The right time is now. Tomorrow is and always will be uncertain. Perfectionism is the enemy of action. Do not let perfect investment plan or a perfect time to invest stop you from starting.

b. Analysis Paralysis – Too much thinking will often result in getting stuck.Some thinking is good — it’s good to have a clear picture of where you’re going or why you’re doing this — but don’t get stuck thinking. Just do.

c. Get the Broad Picture and Start. You need to get the broad picture in your mind. You need to understand your future requirements or what do you want to achieve (goals). You need to know the time you have to meet those requirements. And, then you should have the broad plan to meet the goals. Once you have the broad picture. Get going.
All the planning will take you nowhere unless you take that first step, no matter how small it is.

d. Keep things Simple and take Small Steps. Small steps always work. Little tiny blows can break down that mountain. And then each step counts. Keep the big picture in mind, but start by taking small steps.

Understand the advantage of Investing Early here.

The Little Rules to successful action To be contd … Part 2.

Why you should never invest in ELSS , Dividend Reinvestment Scheme !

Why you should never invest in ELSS , Dividend Reinvestment Scheme, Section 80C, Mutual Fund Investment, Tax Saving Planning.

Equity Linked Savings Scheme (ELSS) is an instrument which many investors use to get advantage in Section 80C, Rs 1 Lac, deduction in Income.

There is a 3 year lock in in these schemes.

If you choose the Dividend reinvestment Scheme, then the reinvested portion gets locked again for 3 years from the date of dividend.

Even if the schemes declare dividends once every three years , part of your investments can be locked in for ever.


1.  Do not opt for Dividend Reinvestment Scheme in case of ELSS

2. In case you already have invested in such an option in ELSS , then change the option to Dividend Payout. (This is provided you are lucky that the dividend has not yet been declared) (Pls note that Fund House will not allow you to change to Growth)

June 2010

Beginner Investors : Investing with Index funds/ ETF’s is a good choice

Guide to Beginner Investors , Investing with Index funds, ETF's is a good choice, Financial Planning, Goal Oriented Planning, Understanding Risk.

What is Index Fund

An index fund is a a mutual fund which tries to replicate an index of a financial market. (For eg: Sensex or Nifty). An Index fund follows a passive investing strategy called indexing. It builds a portfolio with the same stocks in the same proportions as the index. The fund makes no effort to beat the index. The purpose of the Index Fund is to earn the same return as the index over a period of time.

What is ETF

ETF stands for Exchange Traded Funds — these are funds that trade on the stock exchange just like any stock. And they are stored in yuor Demat Account just like any Shares you purchase.

Why are Index Funds/ETF’s not as popular or not  advertised like other Mutual Funds ?

Expert Professionals / AMC’s don’t make enough fees from them, so they often go ignored. Just like Term insurance….. , Term Insurance is not promoted as much. Insurance companies do not benefit from them (You can see the correlation…., What is good for Investors and also available for cheap, is not often promoted enough. Because it does not pocket enough profits for the providers/agents…….)

What is the basic difference between Index Funds/ ETF’s  and Mutual Funds?

Mutual Funds try to beat the index over a period of time. This is active investing. Fund Managers are paid to beat the index over a period of time by generating alpha (The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.).

Index Funds/ ETF’s on the other hand, try to mirror the index returns. This is known as passive investing.

What is the advantage of Index Funds/ ETF’s over Mutual Funds?

– Much Lower Expense Ratios (AMC’s are much lower)

– More Flexible

– Transparent

– Approximately 60%-80% of equity mutual funds underperform the average return of the stock market over a period of time. This is the price of “active management”.

On top of this the AMC charges 2-2.5% of the portfolio value annually.

So , you have to pick the funds carefully. This becomes just like picking Individual Stocks. Of course, if you pick up the right funds (or for that matter right stocks) , then you would be beating the Index handsomely. However this process requires good amount of time, effort and judgement on your part. It sounds simple but is not easy.

– On the other hand , investing in index funds in the beginning , you can start participating in the capital markets and once you have a substantial base, then you can start exploring “active”  investing options.

The writeup on Types of Investors will get you to understand more about different kinds of investors.

Investor Classroom…

Here is a good link — a classroom from morningstar – for all kinds of Investors.whether you are a novice or an experienced investors. It talks about Stocks, Bonds, Mutual Funds and Portfolio etc.  The classroom is from Morningstar US site. However the concepts are applicable in India as well.

It also delves into the financial rations and basics of valuation.


Pretty Useful.

May 2010

Investing in Mutual Funds because they are less risky?

Investing in Mutual Funds because they are less risky, Investing in stocks, Risk , Return, Sharpe Ratio, Treynor Ratio, .

Most of the investors begin investing using Mutual funds.

I am surprised when many people come to  me and ask my advise for investing in Mutual Funds rather than equities because they perceive investing in Equity oriented Mutual Funds to be much safer than investing in equities directly. If you think so, Think again!!

This is an incorrect understanding.

Equity oriented Mutual Funds are as good (or as bad) as the investments made by the Mutual Fund Manager, the underlying assets which the fund manager  invests etc.

The risks and returns are linked to the funds holdings (In case of Equity oriented mutual funds, it is the underlying stocks, their performance and the overall performance of the stock markets). The returns and risks are also linked to the the ability of the fund managers performance in trying to time the entry and exit and generating the ‘ALPHA’ returns .  [[  From Investopedia — Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return.]]

If the Stock Market tanks or crashes, the mutual funds NAV also comes crashing down.  Near term performance of Mutual Funds is virtually linked to the vagaries of the market movements. Long term performance depends on the fund’s objectives, fund manager’s performance etc.

So, please understand that if you wish to invest in mutual funds….. go ahead. But please remove the perception that they are less risky than investing in stocks directly.

If one is a saver kind of investor, a Systematic Investment Plan (SIP) in either A-Category stocks or Mutual Funds  will meet the returns expectations over long periods of time. In fact considering the annual expenses of the Mutual Funds involved, investing in stocks and holding over long period of times might even beat the returns of the Mutual Funds handsomely.

Whether picking stocks or Mutual Funds , you need to stay up to date on the sector or the stock in order to understand the underlying investment fundamentals. You do not want to see your investments go down the drain as time passes.

You can SIP in stocks – The 10 Steps

You can SIP in stocks , Systematic INvestment Planning, The 10 Steps, Dollar Cost Averaging, Rupee Cost Averaging, .

SIP or Systematic Investment Planning is a concept. It means that you periodically invest your money. It inculcates discipline, takes out the emotional part of decision making and allows you to seamlessly participate in investing.

However, many people associate or assume that Sipping is available only with Mutual Funds. Thereby, they miss the whole essence of what SIP is all about. Indeed, mutual funds offer automatic withdrawals from your bank account to be invested in Mutual funds. And they promote SIP (albeit, not aggressively, you see, they want you to make the payments upfront and not by SIP).

However, it is to be noted that SIP is a concept and can be applied while purchasing shares or equity as well. Yes, you heard me right, you can SIP in stocks.

There are many cases, when you would want to SIP in equities like – (a) You want to build your own portfolio of stocks with a tilt towards a particular sector (b) You are a Buy-and-Hold type of Investor (c) You are interested in investing in good Dividend Yielding Stocks (d) You do not want to incur the annual AMC charges in the range of 1.75 -2.5% on your portfolio value year after year which all the actively managed Mutual Funds charge. Check this post. (e) You are interested in investing in ETF’s (Exchange Traded Funds) etc.

There could be ‘n’ number of reasons where you are interested in investing in stocks. Once you have made up your mind that you want to invest in equities, you can go about doing a Systematic Investment Plan for your equity investment.

10 Steps to SIP in Stocks :

1. Decide on the intervals (or periods) in which you would like to SIP. eg: Monthly 25th of every month

2. Decide on the periodic SIP amount you would like to invest e.g.: Rs 14,000/- every month

3. Use a Calendar to set reminders. (I am a google addict You can use google calendar) or use whatever means (Physical Calendar, tell your wife etc.)so that you will receive a reminder call about the periodic investment. And you can set aside the funds to be allocated for investments.

4. Decide on the asset classes to invest. e.g.: ETF’s like Goldbees, NiftyBees, Stocks like HDFC, Cipla, BHEL, ITC etc. Debt ETF like Liquidbees (can be used for the for the debt component)

5. Decide the amount to be allocated to each asset e.g.: Rs 2,000/- each.

6. And that’s it you are all set to start sipping. Execute the Plan. Once you get a reminder Just go ahead and buy the assets.

7. Do a periodic review of your purchases every quarter in order to assess the performance.

8. Have a performance yardstick. Aim for good returns (Hey, there is no harm for trying to beat the index by a couple of percentage points year on year).

9. Measure your performance against the returns. Review.

10. Apart from TIME-WISE SIP, you can also go a step ahead. You can also do a PRICE-WISE SIP as well intelligently. If there is a > 10% drop in price of a stock between your two planned purchases, you can go ahead and pick up the stock and skip the next installment of that particular stock.

Eg: You pick up Rs 2000/- worth of Cairn India @ Rs 200/- on 25-Jan-2010. You have plan of picking up Rs2000/- worth of Cairn India on 25-Feb-2010. However , if Cairn India were to drop by > 10% or more in Jan itself , then go ahead and pick up in the stock in Jan and skip the Feb-2010 installment.

There are many Index ETF’s which are available and which are a good, low cost alternative to mutual funds which you can (or rather should) avail.

Understand what type of Investor you are, if You are the Saver Kind of Investor, go ahead SIP in Stocks. Step-by-Step over a period of time you would have created a portfolio of stocks which will generate income for you in form of dividends and which will also appreciate with time to generate wealth over a period of time.

Mutual Funds – Be Aware of the Charges and it’s Impact

Mutual Funds ,Costs Associated, Charges and it's Impact, Entry load, NFO, Distribution fees, Index funds, Exist Load, AMC, .

Most of the investors begin investing using Mutual funds. I am surprised when many people come to  me and ask my advise for investing in Mutual Funds rather than equities. The reason for the surprise is not because i prefer investing in equities over mutual funds (which I do!!!).

The surprise is  because they perceive or rather believe that investing in Equity oriented Mutual Funds is much safer than investing in equities directly.

This is obviously a very incorrect understanding.

Equity oriented Mutual Funds are as good (or as bad) as the investments made by the Mutual Fund Manager. The risks and returns are linked to the funds holdings (underlying stocks and to the performance of the stock market) and also the fund managers experience and performance. Most of the mutual fund managers try beating the index (because that is what they are paid for). They try to time the entry and exit and outperform the other funds in their category. Even the so called fund managers do end up buying high and selling low.

It has been historically proven that around 80% of the mutual funds UNDER PERFORM the Indexes over long periods of time.

If the Stock Market tanks or crashes, the mutual funds NAV also comes crashing down. Many mutual funds performed worse than the Index in the fall of the stock markets from 2008 through March 2009.

Most of the Mutual funds have Annual recurring costs like AMC Charges, Operational Expenses, Marketing charges. (Entry Load is no more charged, However some mutual funds do have Exit loads). Even if the fund under performs, these charges are deducted from your holdings. Most of the investors do not pay attention at all to these Recurring charges. There are many mutual funds which have been performing really badly in the markets over the past. Most of the New Fund Offers (NFO’s) which have been launched in the past 2 years have grossly underperformed the markets.

You should Get to know of the various expenses involved (Management Fees, Administrative Charges, Distribution fees). There are also other costs involved like Brokerage Costs, Interest Costs, Redemption fees etc.

Another important aspect which you need to aware of is the Turnover Ratio. The turnover ratio measures the number of times that holdings are sold within a specified period of time. It also indicates how effectively the cash is being utilized or how frequently assets are being converted to cash.

The idea behind this post is for you to become aware of the facts before investing into mutual funds and help in investments. All these charges are in the range of 1.5% – 2.5% , and have an impact on your returns over a long period of time. Different funds have different expense ratios. Securities & Exchange Board of India (SEBI) has stipulated an upper limit that a fund can charge. Not more than 2.50 % for equity funds and 2.25 % for debt funds.

A good fund is the one which gives good returns with minimal expenses and ideally with low turnover ratio. You can refer to the following sites to research further valueresearchonline.com or www.mutualfundsonline.com

You should also seriously explore investing in Index Funds or the Exchange Traded Funds (ETF’s)here

Index Funds and ETF’s , try to mirror the index rather than trying to beat the index. And hence they carry much lower costs than mutual funds. This post on Overview of various types of Mutual Funds gives a pictorial view of various mutual funds available for investments.

March 2010

Costly Investment Mistakes to avoid at all Cost – Final Part – IV

Costly Investment mistakes Part 4, Investment Planning, Financial Advise, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience.

You can also cultivate good habits of investing by avoiding the following mistakes.

This series is in continuation to the earlier 3 posts which contains the first 7 common mistakes committed by investors. You can read posts here. (Part I, Part II and Part III)

This post (Part IV) will throw light on the following common 3 mistakes generally committed by investors:

#8. No proper grip on Diversification – If Too little is bad , Too much is no good either

Don’t put your all your eggs in one basket.

There is wisdom is this old saying. Diversification is essentially spreading out investments across different types of asset classes.  (Different kinds of asset classes like Equities, Debt, Gold, and Real Estate etc.)

Even within one asset class – say, equities / mutual funds, portfolio has to be diversified eg: having stocks spread across sectors like Power, Banking, Oil, Telecom sectors, FMCG etc.

Example of over diversification: Having 20 different mutual funds, 50 different stocks and portfolio size is say 5lacs.

Example of under diversification: Having 2 stocks each of 2.5Lacs and both are from Oil sector.

Now, Great investors like Buffet and Munger of Berkshire Hathway, do engage serious money in specific stocks. However, you need to understand that they do intensive research, have access to top management of companies and are into serious investing business.

But for people , looking for investment avenues with the objective – that over a period of time it beats inflation, generates sufficient retirement corpus, provides emotional security, beats the debt instruments by couple of percentage points annualized, which does not provide sleepless nights —- for all such investors,having an optimal diversified portfolio is the way to go.

#9. Not paying attention to Fees, Expenses, Commissions, Taxes involved

If you think education is expensive, try ignorance.

Do you know that themajor earnings source of Mutual fund Providers(Players) are not via entry load (which is now banned by SEBI) , or via exit load (Incidentally these costs are the most advertised). They make their money thru thejuicy AMC charges, which each mutual fund charges you annually. So if you own around 10lacs of mutual fund. You are paying around 25,000/- Rs annually just for holding the units(Assuming highest expense ratios of 2.5% pa). The expenses get factored into the NAV (Net Asset Value) of the Mutual Fund Units. It is intangible and most investors do not feel the pain.

Do you know that over a period of 10 years, or 15 years what kind of negative impact this annual expense ratio business can have on your portfolio? This is over and above the widely known fact that around 80% of the mutual funds worldwide areknown to underperform the Indices. And the fund manager is also subject to performance pressures from the fund house and so has to keep churning his portfolio in order to keep up with the pressure of performing leading to further expense costs. This is one of the reasons I personally do not like mutual funds which do a lot of churning. (You can get the information on portfolio turnover and various expenses of mutual funds from websites like www.valueresearchonline.com or www.mutualfundsindia.com.)

Do you know that ULIP’s (an Investment+Insurance product) carry various expenses which ca be as high as 45 – 60% in the first year. There are umpteen number of charges like (premium allocation charges, mortality charges, admin charges, fund management charges etc, service tax) However the same is never explained by agents.

Do you know the various types of charges associated when you buy/sell shares? There are brokerage charges, service tax, education cess, securities transaction tax (STT), Stamp Duty, Exchange Levy etc.

It makes sense to be aware of these and various other charges involved so that you can make informed choices towards your way to successful investment.

#10. Stop trying to Copy others and Understand your self

Always be a first rate version of yourself instead of a second rate version of somebody else.

Please understand that there is no one-size-fits all solution in the field of investments. Needs and Wants, Risk taking capabilities, vision, emotional quotient, varies from person to person. Many investors make a mistake in simply copying a friend’s (or a relative’s) strategy. Please understand that the strategy might work for him or her. But you need to assess your own situation before jumping into investments and regretting later.

Example: You friend might be doing Futures and Options and Speculation and he might be perfectly all-right with it. He might be having a substantial portfolio base (maybe a good ancestral inheritance) and would be willing to take the additional risk in search for higher returns. However the same strategy of jumping into F&O might not be good for you, if you are basically looking for investments to fulfill your child’s education needs.

Avoid the above common investment mistakes mentioned in this series and become a aware, intelligent and wise investor.