Expense Ratio - Karan Batra

What is an Expense Ratio in Mutual Funds?

An expense ratio is a ratio that measures the per unit cost of managing a fund. The figure is arrived at by dividing the fund’s total expenses by its assets under management. There are various costs the AMC incurs which forms part of the expense ratio. For example, the AMC has a fund management team which consists of highly qualified professionals who track the markets and companies in the portfolio. They make decisions to buy and sell securities to meet the objectives of the scheme. In addition, the asset management company also incurs expenses such as transfer and registrar, custodian, legal, audit fees, and fees to be paid for marketing and distribution of its products. These costs are recovered through its unitholders on a daily basis. The daily net asset values (NAVs) of a fund scheme are reported after deducting such expenses.

There are different components to Expense Ratio.

  • Management fee: A mutual fund is a professionally run scheme so you have professionals who you actually select different schemes and there’s a lot of research that goes into it so the fee which is charged by those professionals is categorized as a management fee.
  • Administrative cost: All the cost associated with customer support, record keeping as well as offices are all categorized under admin cost.
  • Sales and distribution: The cost associated with marketing mutual fund schemes and also the fee which is paid to the different broker’s or distributors are categories under sales and marketing.
Gold Investments

Different Gold investment options in India

You can invest in gold in various forms be it buying gold in the form of jewelry, coins, or bars in physical form, Gold Exchange Traded Funds (ETF) and the sovereign gold bonds (SGB ) in the paper-form. There is an option of gold mutual funds as well, where they are ‘fund of funds’ which further invest in gold ETFs.

 

MyWay Wealth Weekly Update (Issue #30): Decoding the elections, corporate earnings revival & more

“If you can keep your head when all about you Are losing theirs and blaming it on you,”
“Yours is the Earth and everything that’s in it, And—which is more—you’ll be a Man, my son!” ~Rudyard Kipling (If, 1910)

The above verse is an excerpt from Rudyard Kipling’s collection and often quoted as Warren Buffett’s favourite poem that keeps him going through volatile times.

With many investors getting worried about the upcoming election results and the uncertainty it brings to the Indian political backdrop and consequently in the stock markets, this poem definitely offers some guidance.

Here’s an interesting perspective to how markets have reacted during the pre-election and post-election seasons in the past 38 years (10 General Elections).

Prima facie, one may concur either one of the following:

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MyWay Wealth Weekly Update (Issue #29): A sticky affair: What’s oil economics without crude politics?

“I’m a free trader, the problem with free trade is you need smart people representing you we have the greatest negotiators in the world, but we don’t
use them, we use political hacks and diplomats.”
-Donald Trump (much before the recent sanctions on Iran)

Leaders of major Asian countries woke up to find themselves in deep water as the alleged poster boy for free & fair trade – Donald Trump made a not-so-free-and-fair announcement to cancel all waivers awarded to the sanctions on Iranian oil. While the reason for such an announcement was mentioned as – an attempt to curb terrorism financing; however, the United States’ equivocal stance on Pakistan does not add much credibility to their apparent concerns around terrorism.

Asia contributes to ~35% of the total global demand for oil and is incidentally a key importer of Iranian oil. Within Asia, China and India are the top two importers of the Persian oil.
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investment

The Portion of Debt in your Investment Basket

Did you know that even as a kid in school we had a portfolio of investments? We’d divide our pocket money to get our candy and our favorite cake, sometimes we would have small savings to buy those shoes, or even loan it to a friend for a while. So as we grow our portfolio becomes bigger in terms of scale and range of investments. We focus more on security and future. But how much of our total portfolio should go into these channels? Why do we have to have debt instruments?  Diversification was the first rule learned in investing. The story of when we put all our eggs in one basket and it all breaks when the basket falls down, is familiar to all investors. But perhaps you never got to the part of hstow many eggs and in which basket should we put it in. 

Debt is the basket which offers you security. But the word itself doesn’t give a ring of security because it is often associated with words like ‘loans’. In truth, however, it is essential for every person to invest in some debt instrument in his lifetime. The different products include Public Provident Fund, Fixed Deposit, Bonds, etc.

So when it comes to giving a slice of your portfolio towards debt instruments here are a few things to keep in mind:

  1. The choice of the debt instrument is vital. So ask yourself what do you want it to do? The answer should either be to providing money on short notice or provide stability to long-term investments, both of which is given by debt instruments.
  2. Focus on just the top debt instruments and leave the rest. If you try to pick too many of debt funds you tend to have a mediocre investment which gives high safety but low returns. Don’t try segregating eggs in that debt basket so much.
  3. The allocation of your investment in Debt instruments should be in proportion to your age. The younger you are, the better it would be to invest in growth-based schemes(equity). When you get older you must focus more on stability(debt).

When it comes to Provident Fund or Pension Fund, that are retirement schemes by the Government of India, its sole purpose is to set aside money from a person, preferably during his employment and return it back in a lump sum along with a small amount of interest.

The Public Provident Fund is one of the kinds of PF accounts for any individual at any age, even for an infant. The greatest benefit of this is the returns which are completely tax-free. The account stands as your loan to the Government at the advantage of receiving a tiny amount of risk. It allows you to invest a minimum of Rs.500 to a maximum of Rs.1.5 lakh per year so as to ensure the account remains active for the lock-in period of 15 years. The PF or Pension Funds are to safeguard your lifestyle after retirement, but they are not the only debt instruments you can rely on. Read more about PPF on the MyWay Wealth website.

A Fixed Deposit is a popular stowaway for your money which saves upon a fixed rate of return during its term. It is applicable for tax and is affected by inflation in the market. It is suitable to use as an emergency fund. Suppose you have a wedding to host or pay for your parent’s medical bills it can be immediately withdrawn to meet those expenses at a reasonable penalty. Whereas, as an investment, it is not a suitable option as it guarantees neither safety nor growth. To know more read the article at MyWay Wealth’s Blog about Fixed Deposits.

It’s quite a dilemma, isn’t it? The PF or PPF is an important long-term savings scheme for a retirement corpus. However, as mentioned before if the expectation from your debt basket is to help in cases of emergencies a Fixed Deposit would work much better. The PF focuses to help you in the long term and the FD will be more reliable as an emergency cell. Click here to know more on that.

Wouldn’t it be great to have one that serves as both in the long-term and act as an emergency fund? In uh a case Mutual Funds are the way to go! Specifically, the Debt Funds in the Portfolio that invest mainly in bonds, giving you security, relatively higher returns, and high liquidity.

MyWay Wealth Weekly Update (Issue #28): Mutual Funds shift gears (& portfolios) this election season and more…

As the election season closed in and the pre-poll month of March’19 presented a rally – largely driven by foreign inflows, mutual fund managers capitalised on the rally to get rid of some slag and re-align portfolios in light of post-election expectations.

Here’s what the portfolio rejigs for the month of March 2019 looked like:

As evident, the industry seems to be loading up on retail consumer-oriented sectors while majorly selling off bulky wholesale business sectors. The above graph illustrates only the top five sectors bought and sold; however, the total value of stocks bought & sold in Mar’19 was INR 2,350 Cr. & INR 1,645 Cr. – net buying of over INR 700 Cr. (more…)

Real Estate

Investments in Real Estate, not very Realistic

Home Sweet Home. It’s such a secured feeling to own land and have your property on it. The pride is immense and overwhelming.

Brokers also use these emotional flavours to sell properties. The ease with which one gets a loan these days has lead the masses to invest in real estate easily, but not wisely!!

We have heard our elders say, “Invest in real estate, the future value of the property will earn you a fortune”.

Is this really true?

Here are 6 reasons not to invest in Real Estate.

  1. Low Liquidity:

We buy property with the hope to sell it at a higher cost. But what if an emergency arises and we want liquid cash immediately. Remember your urgency in selling a property is a treat to a potential buyer. Because, your dire need for cash would lead you in selling your property at a lower price than its true value.

  1. Low returns

Most real estate investments fetch you the same amount of return as that of Fixed Deposits. Lines from Nishant Agarwal (managing partner and head (family office), ASK Wealth Advisors )“Considering the rising interest rates and high maintenance cost and tax on rentals and capital gains, I would not suggest investment in physical real estate”.There is no guarantee that you would find occupancy if you are depending on getting income in terms of rent.

Which means, it’s obvious you’re not getting index-beating returns..

  1. Unpredictable

I remember my dad saying  “20 years before if I had bought this house in Kammanhalli, I would have been a crorepati today”. Why?

Because rates increase in real estate depending on the property’s location not on how much you spend on the house, or how does the property look, which makes real estate an unpredictable asset class.

  1. Tracking is a pain.

Mutual Funds are managed by Professional Fund Managers, you have apps to give you alerts, even if you owned more than one scheme.

But how would you track real estate? How do you know that the broker dealing with the property is not a fraud? How would you track your property? You can’t track it daily, can you?

  1. Government Regulation

But the recent disruption announced by our Prime Minister, through “Demonetisation” has curbed the circulation of Black Money by stripping the status of our currency unit.

People don’t even let properties on lease these days, then forget buying a property. Thus reducing the demand of real estate in the market.

  1. Additional expenses.

You need to shell out a bomb to buy a property. Many opt for loans. But in addition, there are other expenses that come along with a property:

  • Maintenance charges
  • Finding a tenant
  • Commission to brokers
  • Utility Bills
  • Taxes

This is exhaustive both financially and physically.

The next time you want to Invest in Real Estate, Think!!

There are better options to invest such as  Mutual Funds. Direct Plans, SIPs, Gold Funds or Equity Mutual Funds help you with wealth creation in the long term. Use “MyWay Wealth” to discover, track and invest in Mutual Funds.

MyWay Wealth Weekly Update (Issue #27): Ab ki Baar, Nifty 12,000 paar? & more…

India has begun conducting the world’s largest, democratic general elections this week. Opinion polls have swung towards reinstating faith in the current government, albeit with reduced majority.
Here’s what the opinion polls conducted in March’19 look like:

While the general elections typically induce capital market volatility as most investors choose to sit tight till there’s more certainty around the political situation, this time seems to be different.

Most times, foreign investors remain fence-sitters as the great Indian elections come into play, but this time, they’ve jumped the fence onto the field – right at the beginning.

Bellwether indices have been charting new highs – Nifty at 11,700 & SENSEX at 39,000.

 

 

 

 

 

 

So, is this all happening just because everyone is expecting the current government to be re-elected? Stronger election result anticipation is definitely a factor, but that’s not all of it.
Here are a few other factors that may be aiding investment growth in India:

Stronger Currency

INR strengthened by almost 2.3% in March 2019 making it the star currency in all of Asia.

This strengthening of the INR can be attributed to a multitude of factors including foreign portfolio buying stocks & bonds to a cumulative tune of $8 billion this year.

 

 

 

 

 

 

Softening bond yields

The 10-year government bond yield softened significantly as RBI implements a solid monetary easing policy through rate cuts and other measures like the swap auction.
This is expected to increase liquidity and promote credit & growth in India while inflation continues to be in control.
Decrease in yields can be interpreted as increase in price and profits for bond-holders

 

 

 

 

 

 

 

What lies ahead? What should an investor do?

While elections typically lend an air of increased volatility to stock markets but, quite frankly, volatility is where wealth is manufactured.
All indicators seem to point towards a fundamentally strong India and stronger Indian economy. This sets stage for a stronger future for Indian equities. Now is a perfect time to step-up SIPs and for investors with a lumpsum, it is advisable to go through the STP route – invest in a holding fund and periodically transfer to pure equity funds.
Feel free to reach out to understand more around what type of equity funds suit you best and what themes do we expect to play out post-election.

Explore More

If you have any concern, please write to us at ask@mywaywealth.com or call at 080 48039999we would be happy to answer your query.

Thanks,
Nirav (Head of Research)
MyWay Wealth

MyWay Wealth Weekly Update (Issue #26): Essel Group fiasco & the way ahead for you!

It is December 2018; the mutual fund industry is just recuperating from the mess created by IL&FS defaulting on its repayment & major AMCs & rating agencies being dragged into the sludge for their failure to recognise the imminent default – intentional or unintentional is a debate for another day.

Though AMCs were nursing wounds caused by an unprecedented event, their portfolios continued to stand bold with almost INR 8,000 cr. plugged into debt securities of an already troubled Essel Group. What’s more is that over 20% of this was held in portfolios of Fixed Maturity Plans and there was no visible attempt to dilute concentration.

Cut to April 2019.

Even as IL&FS taught the industry a great lesson in risk management, many failed to learn or perhaps chose not to. This is evident by the default on FMPs which has resurfaced for perhaps the first time after the 2007-08 fiasco.

What happened exactly?
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MyWay Wealth Weekly Update (Issue #25): Markets have peaked – important action required?

“Do not wait until the conditions are perfect to begin. Beginning makes the conditions perfect.” -Alan Cohen

The new financial year has begun, and capital markets are abuzz with opinions on the upcoming election results, the liquidity situation, foreign inflows and similar talks.

While these economic events are crucial, I would like to reserve these discussion pointers for the posh boys at D-street and shift my vision to the topic that really matters – your wealth-creation journey!

The new financial year brought in a fresh breath of relief as equity markets rallied to touch meaningful highs (Nifty @ 11,700; SENSEX @ 39,100) – indices recovered and grew beyond what it lost in the last financial year. However, there has been an uncanny increase in the number of requests to address variations of a very specific investor query.

“Markets have peaked/tanked; what do I do?”

There is a good chance you opened this email out of sheer excitement to take an action on your investments. But, here’s why you must take a step back and think!

Action bias, or in other words – the urge to do something when something happens even though it does not necessitate you to do anything, is turning out to be the biggest factor to wealth erosion.

Given that the urge to take action is a typical behaviour-driven situation, I would like to quote a self-explanatory sketch from ‘The Behavior Gap’ by Carl Richards –

While this is a very crude sketch, it is perhaps the most powerful I’ve seen.

There is enough and more data to prove how profitable capital markets are, but the fact of life is that most investors haven’t experienced it first-hand and subsequently tilt towards believing that wealth creation by capital markets is actually a myth perpetuated by the industry.

But let me assure –  YOU (read as: your actions) are more responsible for your investment performance than the markets are. Following are the behavioural fallacies that lead to a not-so-good wealth creation experience.

Gap #1: Nobody can time the market, but many try to do so – albeit unsuccessfully

Back to basics. Price of an equity share is determined by the demand-supply mechanics driven by billions of dollars, billions of investors, millions of algorithms. Also, every optimistic buyer at a price point has a pessimistic seller. And hence, it is difficult for anyone to predict the market accurately since that would require predicting the movement of the expansive range of participants.

Gap #2: You can’t wake a person who is awake!

The number one rule for profitability is “buy low, sell high”. Now, I know this is common sense and you already know this. But what you may not know is that most investors tend to do the exact opposite by succumbing to their own emotions. The image alongside, again borrowing from Carl Richards, is how most investors manage their investments:

Gap #3: Time, and not timing, is your friend in the market

Wealth-creation is a long process requiring patience and persistence. It is best to try quick bets in the casino or at the race-tracks. Capital markets, contrary to popular belief, is a more of a wealth-building avenue than a money-minting machine.

Pick any index – perhaps Nifty for this case. In the short term, all you will see is high volatility across a chart reacting to various events. But, in the long term, you will notice an uptrend emerging! It is important to ride the uptrend and ignore the volatility. Be an investor, not a trader.

 Fig. 1.1  Nifty: Short Term : 5-day Volatility                                              Fig. 1.2  Nifty: Long Term : 5-year Uptrend

Like Benjamin Graham put it right on spot – “In the short run, the market is a voting machine but in the long run it is a weighing machine”

Here’s the bottom-line: The only reasons why you must take an action on your investment portfolio is if there is a change in your financial goal/plans or if your portfolio requires a rebalancing.

At a fund-level, we are already keeping a close watch on your investments and will notify you in case of any rebalancing required.

Explore More

If you have any concern, please write to us at ask@mywaywealth.com or call at 080 48039999we would be happy to answer your query.

Thanks,
Nirav (Head of Research)
MyWay Wealth