Are mutual funds really transparent?

“Why do you say that mutual funds are transparent? I don’t agree.” Someone asked. ... 

Read on ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/05102015/05102015-md-gm-14.pdf


The English translation of the article is as under:

“Why do you say that mutual funds are transparent? I don’t agree.” Someone asked.

“Well, why do you say so?”

“You know when I buy stocks, I know exactly what price I would get, but when I buy mutual fund units, I do not know at what NAV I will get the units. Where is the transparency?”

Good question. Someone buying something would like to know the price at which the purchase happens. If you only get to know it later, there has to be a very strong reason for the same. Still the investment vehicle that claims to be transparent, does not allow one to know the transaction price in advance.

Let us understand the reason for the same. (The discussion refers to transaction prices in case of open-ended mutual funds only).

First of all, pricing. Mutual fund units are priced once a day for declaration of NAV. So, for all open-ended mutual fund schemes, there is only one transaction price per day. This price is linked to the NAV for the day. This NAV factors the closing prices of all the securities at the end of the day, which are available after the day is over.

While the transaction is reported before a cut-off time, the NAV is calculated hours after the cut-off time. Thus, it is impossible for one to know the NAV at the time of the transaction. The only known price (or the NAV) is that of yesterday.

Why should one not be offered the previous day’s price? That brings us to the second reason, which is the principle of fairness. As we have seen earlier, a mutual fund is a collective investment scheme. There are a large number of investors participating in such a scheme. In an open-ended mutual fund scheme, on any business day, there could be some investors entering, some exiting and some others doing no transaction at all. All the investors must get a fair price and none of these should be able to profit at the cost to others.

All the security prices as of previous day have been factored in calculation of the NAV as of the previous day. Today’s prices are yet to be known.

If someone were to be offered units at yesterday’s price for a transaction done today, the one-day gin (or loss) would go to someone buying today, without even putting any money. In that case, the income investor is likely to watch the prices and do a transaction only if it is beneficial for him (or her). The loser would be the investor who has stayed invested for long.

Thus, the question is not so much about transparency, but about how the NAV is calculated and offering fair prices to all investors.

-        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.

Transcript of chat on www.moneycontrol.com on 14th Sept, 2015

http://www.moneycontrol.com/master_your_money/view_chat_transcript.php?cat=&chatid=2497

Why are markets falling? My post

Why are markets falling?


http://sapnabookhouse.blogspot.in/2015/09/why-are-markets-falling.html?utm_medium=social&utm_source=facebook.page&utm_campaign=postfity&utm_content=postfity51442&m=1

Understanding why SIP is the best investment strategy for some ...

Read my article on why SIP is considered to be best, but also keep in mind why and for whom ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/14092015/14092015-md-gm-14.pdf


The English translation is as under:

“SIP is the best investment strategy” – an expert was speaking on the television. A friend sitting next to me asked, “Does it mean that investment through Sip would always fetch higher returns? Or at least most of the time?”

Well, the question is logical. Our mind interprets information in a predictable manner. The moment an investment is mentioned with the adjective “best”, we interpret as something that is likely to offer highest returns. This is true for majority of investors.

However, this is not always true. Very often, there are other parameters that make an approach better than other options.

In the past, we have discussed about SIP – Systematic Investment Plan. It is an approach that allows an investor to systematically and regularly invest a predetermined amount of money into a chosen mutual fund scheme. This ensures discipline – critical for investment success.

Apart from discipline, SIP is ideal for a long-term approach to investing by most people, who earn regular income. Simply because the income stream is regular (monthly salary), one has a need to invest regularly. SIP allows just that. A single instruction to the mutual fund company and your bank and all your monthly savings go into the scheme you have selected – no hassles of wondering which scheme to select every month, no hassles of filling up forms and signing cheques every month.

That is what makes it the best in terms of offering great convenience to fulfill a need to invest on a regular basis.

Apart from that SIP also helps accumulate a corpus through the benefit of compounding, if you stay invested in the scheme over long term. Compounding works wonders over long periods of time. as the corpus grows, slow and steady, the future returns on the grown corpus add up to large amounts. For example, if you have invested Rs. 10,000 per year in a scheme that offers 8% p.a. and you keep reinvesting all the earnings in the scheme, the earning in the 11^th year would be Rs. 11,589. However, if you continue for another 10 years, the earnings in the 21^st year would be Rs. 36,610. By the way, in the 31^st year, the earning would be Rs. 90,627. You can see the magic happening here. Longer you stay invested, higher the benefit of compounding.

Just as an additional benefit, if you are investing in an equity fund through SIP, it would allow you to make the inherent volatility to work for you. As we all know, the prices of equity shares go up and down regularly. When you are investing a fixed sum of money in an equity fund, you buy fewer units when the prices are high and you buy more when the prices are low. This happens automatically. Let us see with some numbers. Assume that you are investing Rs. 10,000 per month. In the first month if the NAV of the fund is Rs. 20, you buy Rs. 10,000 / Rs. 20 = 500 unitss. If the NAV goes up to Rs. 25 in the next month, you would buy only 400 units (Rs. 10,000 / Rs. 25). At Rs. 25, you bought 400 units and at a lower price of Rs. 20, you bought more units. This brings down the average purchase price of the units. When your purchase price is low, the returns are better (as compared to buying at higher price) – and this is common sense.

These are the features that make SIP an ideal investment approach for those in early stage of life, earning regular income and are investing for a long-term goal, far in future.

Wish you a happy and fulfilling life.

-        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.

Chat session on www.moneycontrol.com

Chat session on www.moneycontrol.com on 14th Sept at 4:00 PM to 4:30 PM

Mutual fund is an ideal investment vehicle if your financial goals are clear

Click on the link below to read my article on Mid-day Mumbai edition (Gujarati)

http://epaper.gujaratimidday.com//epaperpdf/gmd/07092015/07092015-md-gm-15.pdf


The English translation is as under:

Mutual funds have been in India for a while now. Still, many misconceptions prevail about what exactly mutual funds are. One such misconception is that mutual funds are complex products and are suitable only for expert investors.

The reality is: Experts manage mutual funds for the benefit of novice investors. A mutual fund is not really an investment by itself, but a way to invest. Instead of managing our money ourselves, we can outsource the job to a team of experts.

As we have seen in one of the articles earlier, a mutual fund is a vehicle that allows investors to invest in a portfolio of securities. The portfolio is created with an investment objective and a fund management team manages the same on behalf of these investors. Each mutual fund scheme has a defined scheme objective and style. The investment universe is also stated upfront. An investor has to select the scheme that matches with one’s own investment objectives.

This is where the expertise of an investor and that of a professional differs. A professional manager decides why certain investments must be made. Most of the retail investors are not clear about their investment strategy and hence find it difficult to select appropriate mutual fund schemes. While selection of individual securities requires a detailed work, selection of a mutual fund portfolio is a relatively easy task. Simply by outsourcing the task of fund management to a professional team saves a lot of time and efforts.

Add to that various conveniences offered by mutual funds, e.g. SIP, STP, switches, investment of any amount, any time, etc. and you have a very flexible investment vehicle. You can suit any of your requirements through mutual funds.

Mutual funds are ideal if you know your financial goals. Planning to reach your goals can be very easily done using mutual funds. You can also periodically check your progress towards the goals.

In fact, investing through mutual funds is so easy that it is recommended investment strategy for all the beginners. One needs to follow these steps:

1.     Start with your risk profile and statement of goals. Based on that, arrive at an asset allocation plan.

2.     Implement the plan through buying proper funds in line with the asset allocation plan.

3.     The selection of funds is done through subjective and objective filtering. Some of the parameters the objective filtering looks at are:

a.     the past performance of the fund – but remember, it is not only about the returns generated by the fund in question;

b.     the general behavior of the fund’s NAV with respect to the broader market;

c.      the risk associated with the fund (as represented by the standard deviation), etc.;

4.     Some of the parameters the subjective filtering looks at are:

a.     the conduct of the fund house,

b.     services of the fund house,

c.      the adherence to or the deviation from the objectives of the scheme, if any, etc.

So go ahead, take the advantage of mutual funds.

-        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.