Wish you a Happy Diwali ...

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Diwali, the festival of light, is when Hindus perform a Laxmi pooja. What are we asking for when we pray to Goddess Laxmi? We ask for prosperity, not just money. There is a difference between the two. In order to understand the same, let us look at the photo of the goddess we use for the pooja.

One of my favourite Diwali posters is one that shows Goddesses Laxmi and Saraswati along with Lord Ganesh. It is not for no reason that these three are shown together.  
 

While we all need blessings of Goddess Laxmi to be successful in life and grow, she must come in our life flanked by Goddess Saraswati – the goddess of knowledge and Lord Ganesh – the god of wisdom. If Laxmi comes along with these two, it stays and brings bliss in life. And that is true wealth – not mere financial wealth.

Trying to earn more and more money without proper knowledge and wisdom can lead to ruins. Money may come but that would not bring bliss in life.

The difference between “knowledge” and “wisdom” also must be understood at this juncture. “Knowledge” is to know something – to be aware of something – to understand and being able to explain it. “Wisdom” is intelligence – it is about being able to judge – to use discretion – being able to separate the good from the bad – the right from the wrong.

First, let us address the knowledge part. It is critical to know what one is doing. “Look before you leap” is not just a proverb; it’s a great advice. Whether it is income, expenses, loans or investments, it is important to know.

Questions on income:

·       How sustainable is the income?

·       How stable is the source of income? This is especially critical for self-employed persons and small business owners. However, in the present times, even jobs are also not guaranteed.

·       Do you understand the taxes on the income?

Questions on expenses:

·       Know the monthly budget – the expenses you incur

·       How much of the monthly budget is spent on necessities and how much on luxuries? Which of the luxuries can you cut down?

·       Is it possible to reduce some expenses through finding alternatives?

·       Have you kept provision for these expenses in case there is an emergency, e.g. health issue or loss of job?

Questions on loan:

·       Have you understood the terms of the loan?

·       What is the interest rate on the loan? Is it too high or too low? If it is too low, is there a catch?

·       What are the various penalty clauses?

·       What are the flexibilities?

·       Can you terminate the loan earlier without any penalty, in case you get funds suddenly?

·       What is the security required by the lender?

Questions on investments:

·       Have you understood the terms of the investment?

·       What is the (expected) rate of return?

·       Is it too high or too low? If it is too high, is there a catch?

·       Is the risk too high? Understand the risk involved. If you do not understand the risk, please avoid the investment. Every investment carries some risk.

·       Is there a lock-in or is the investment liquid?

·       At what rate would the earning be taxed?

This is not an exhaustive list, but only an indicative one.

Discretion is required both while earning as well as spending. Is the money coming in through the right means or are you taking some actions, which may be incorrect ethically or morally? Are you spending too much money for luxuries than fulfilling your responsibilities?

Wisdom and discretion must be applied to the assets and liabilities, too. Are you borrowing wisely? Is it really required? Is it a good loan? Are you investing smart? Or are you acting on tips without understanding the risks? There have been many instances when one has asked “Is it safe?” or “I hope there are no risks” in stead of asking “Please tell me about the risks present. And how do we manage those”.

So, this Diwali, make sure to pray for Laxmi to arrive at your place – but the right type and through the correct means. Pray to Goddess Laxmi to stay in your life forever. Make sure your life is worth for her to stay forever.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Mutual fund expenses - how are these calculated and charged?

How are mutual fund expenses charged? Do I pay both at the time of entry and exit? In such a case, does it not become costly? There are many questions around the fund expenses. Read on for the answers

http://epaper.gujaratimidday.com//epaperpdf/gmd/03072017/03072017-md-gm-12.pdf

The English translation is as under:

Understanding mutual fund expenses

We have already covered the expenses charged for the management of a mutual fund scheme in one of our earlier articles. Mutual fund companies are allowed to levy only two types of charges, viz., (1) exit load – chargeable at the time of investor’s exit from the scheme in certain schemes only if the exit is within a stipulated period of time, and (2) fund expenses – chargeable to meet expenses and payment of fees to various constituents.

We will elaborate on the second in this article today.

There are various constituents working to make the mutual fund run professionally in the best interests of the fund’s investors. These constituents need to be paid their fees for the services provided. This fee is payable through charging each scheme a certain percentage of the fund’s corpus.

These expenses are mentioned in terms of percentage of the scheme’s AUM (Assets Under Management) or the scheme’s corpus. SEBI regulates the maximum expenses that can be charged to the scheme.

These expenses are mentioned as annualized percentages with respect to the scheme’s AUM, but charged on a daily basis such that the scheme’s NAV accounts for the expenses on a daily basis. Let us understand the nature of these expenses with a calculation.

Let us say, a scheme’s corpus is Rs. 1,00,000 and the expenses are 2% p.a. In such a case, the expense charged for the day would be as under:

Expense charged for the day = Scheme’s corpus X fund expenses (% p.a.) / 365

In the example given,

Expense charged for the day = Rs. 1,00,000 X 2 % p.a. / 365

                = Rs. 5.48

If the scheme corpus goes up the next day, a higher amount would be charged for that day. At the same time, if the scheme corpus drops, the expenses charged would be lower. Taking the calculation further, if the scheme’s corpus goes up to, say Rs. 1,10,000 the next day (corpus can change on account of change in the market prices of the securities as well as fresh inflow by investors or redemptions or payment of dividends).

Expense charged for the day = Rs. 1,10,000 X 2 % p.a. / 365

                = Rs. 6.03

On the other hand, if the corpus had falled to Rs. 95,000; the expenses charged would reduce.

Expense charged for the day = Rs. 1,10,000 X 2 % p.a. / 365

                = Rs. 5.21

If someone stayed invested only for three days and then took the money out, the expenses charged would be only for the three days that one stayed invested. Also please note that this is not charged at the time of entry or exit, but on a daily basis. Thus, the expense is charged fairly to all fund investors in proportion to the amount invested as well as their stay with the fund.

Hope this clarifies some doubts that one might have.

Quoted in India Today

In a story related to the TER on mutual funds, my quote was taken by India Today.

Here is the photo of the relevant page

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