Archive for the ‘Mutual funds’ Category.


The previous post on indexing generated a lot of comments and questions. I will list some of these questions and answer them from my perspective

Q1 – If you can beat the market, why do indexing?
This is one of the most common questions. The issue is not as black and white as it seems. Let me try to break my response into several points

Did you beat the market or were you lucky?

 How do you know beforehand, that you ‘will beat’ the market? Let’s say you beat the market for 3 yrs. how do you know its luck or skill? Most of us think its skill!!

The only way to know that, is to keep doing it for 6-7 yrs and see how it plays out. One can be convinced then and put more eggs in the active investing basket, but till that happens what should one do?

 I have invested a part of my capital in the past in stocks directly as i did not want to risk the whole money. If you think that is being too chicken, I thought so too.  I started by investing 100% directly, saw my portfolio go down by 20% and learnt my lesson. So unless one is sure that one has the skill to beat the market and has the data to back it up, one should be careful about going 100% in stocks.

Now if you follow this thought process, what is the best next best opportunity – i would say investing in mutual or index funds.

Amount of time available
Do you have the time to learn and track all your stocks on a regular basis? It is amazing that so many investors, if you can call them that, think that beating the market is child’s play. One has to spend 1-2 hrs per week, watch CNBC and pick a stock tip here and there and that’s it.

Is there is any activity in life which will reward you with good monetary returns easy ? If it was so easy, why are there so few full time investors ?

So if you are working full time and do not have the time and interest in analyzing and researching stocks, the next best option is to invest via mutual funds and index funds

Q2 – Mutual funds are horrible, they charge 1-2% expense ratios. Even index funds are bad as they have high tracking errors
I have never understood this argument. I agree mutual funds in India are sneaky, bad and indulge in bad practices. So what is the alternative? Fixed deposits?.

The only way to participate in the equity markets is to buy stocks directly or via mutual funds. I would say 95% of investors should not invest directly. That may sound harsh, but it better than losing money and your shirt. The second best option is either mutual funds or index funds. There is no other option to invest in the equity market.

Real estate is a different story. But if you have Rs 20000 to invest, is real estate an option?

Please don’t even get me started on gold, oil etc. All this enthusiasm is due to the recent run up in gold price. Can you build a retirement plan around gold and other kinds of commodity investing?

Q3 – can you give some example of mutual funds ?
I have discussed some funds here. Some funds I like are HDFC equity fund, Reliance growth fund and Franklin Templeton blue chip fund. I have invested me and my family’s money in it.

Are these the best funds out there? I think not. They are good enough and work for me.

For index fund, Nifty BEES (exchange traded funds) offer the lowest cost and tracking error. However they trade like stocks and so one cannot setup an SIP. As indexing is still not used widely, most index funds have high costs and hence a tracking error of 1% or more (tracking error is the difference between the index and the fund’s returns).

So if you want to do an SIP, pick either a decent mutual fund or one of the index funds with the lowest tracking error and set it up. It is better than having these intellectual arguments about the 1% difference and not do anything about it.

Sometimes it is better to go for a 90% solution than trying to achieve perfection.

Additional thoughts
I have seen a lot of different approaches to indexing. Buy when the PE falls below 12 or rises above 20 or when dividend yield is below this or that – wait I have written that myself 🙂

If you are generally interested about investing and like to play around or spend time on it like me, try all the gymnastics. However at the end, if you analyze the results you will realize that all you got out of it was a minor 1-2% annual advantage.

I think it is much smarter to pick a decent index fund or mutual fund, set an SIP and get on with it. Check the performance after every 1-2 yrs and you will find that you are doing fine.

Of course no one is likely to accept this suggestion as it does not feel smart. Where is the fun in it ?


The thing about a blog is that if you make an error in your analysis, especially a dumb one, it gets caught very quickly. I did not notice that HDFC floater LT has a 3% exit load. As a result, one of my conclusion in the previous post is invalid, if one is looking for parking short term funds. If however, the time horizon is more than 1.5 years, I think HDFC floater LT should turn out to be a decent option.

In  addition to the options posted in my previous post, it was pointed out that flexible deposits and sweep-in are  good options for short term funds. I agree with those comments completely. There may be a difference of +/- 1% point in terms of return between these various options, but unless you plan to invest 10 crores, I don’t think it will make a huge difference.

My personal preference when investing short term funds is for liquidity and safety of principal. Returns are important, but I will not compromise on the safety of my capital. A few percentage points is not worth the risk at all. I am a very conservative and risk averse investor in terms of debt and have always given high priority to the safety of principal.

Personal finance
This brings me to the next topic – personal finance. My own personal finance is split between equities, a little bit of debt instruments and cash. It is an idiosyncratic split reflection my personal needs. I will definitely not recommend it to others who may have different goals than mine.

I don’t consider real estate (primary home) as an investment. I find it completely stupid to think of my primary home as an investment. If my home appreciates by 50%, what will do with it ? sell it and go live in a forest ? A home is an expense and responsibility. A second or third home or apartment can be called as an investment, but that’s a different story.

I consider insurance as simply that – insurance. So I have never bought a ULIP or a hybrid policy which are instruments of fleecing the common man. I have bought term insurance to cover my liabilities and to secure my family.

Keeping it simple
I prefer to keep my personal finance structure simple and manageable. I prefer to low to non-existent risk on my debt and other investments. The only risk I like to carry is the one for which I am paid – equity risk.


I wrote in my last post on my views on inflation and one venue of investing or hedging against it – floating rate funds. Two key points to keep in mind, when reading my views on inflation or any other macro fundamentals. They are views and guesses, nothing more and nothing less. Even paid economists get it wrong more than 50% of the time and it is their job to get it correct.

The second point – I look at floating rate funds as temporary place holders for cash. If I don’t find attractive ideas, I invest the surplus cash in a floating rate fund till I find something interesting. That way, the cash is earning more than the paltry 1% in a savings account and I can liquidate with complete ease and within 1-2 days if I want to move the cash to an attractive idea.

Due to the second point, I don’t agonize on finding the most attractive fund as the difference would at best 1-1.5% per annum which is not worth the effort for me.

A caveat – I am not a typical investor (that does not mean I am a super smart investor). I spend far more time looking for attractive ideas and as a result my focus and effort is directed towards higher return opportunities such as equities or arbitrage. If you do not fall in this category – investing being an area of extreme interest – then my suggestions on personal finance may not be entirely valid for you. If you really want to invest in a debt fund for the long turn, it makes sense to do more homework and invest intelligently

Floating rate funds are basically debt funds which invest in floating rate securities. So if the interest rates rise, the return on these securities and hence the fund rises and vice versa.

This is not the same in case of fixed rate funds. A fund which invests in fixed rate securities faces a different risk. When the interest rates rise, these debt instruments with fixed rates fall in value and so does the mutual fund. As a result these fixed rate funds show a higher return in falling rate scenario and poor returns in an increasing rate scenario

My views on mutual funds can be found here and on debt funds here.

Selection criteria
I had written the following in terms of debt funds

– Mutual funds – fixed income: This is my favored avenue during a falling rate scenario and I tend to invest with well know mutual fund houses such as franklin templeton, DSP etc. At the time of investing in a debt mutual fund, I tend to look at the following factors
o Asset under management – avoid investing in funds with low level of asset as the expense ratios could be high.
o Fund expense – lower the better. Although the indian mutual fund industry typically gouges its customers and charges too high compared to the returns.
o Duration of fund – This is the average duration of the fund. A fund with longer duration will rise or fall more when interest rates change
o Fund rating – 80-90% of the fund holding should be in p1+ or AAA / AA+ securities.
o Long term performance of the fund versus the benchmark

– Mutual funds – floating rate funds : This is my favored approach in a rising rate scenario. In addition to all the factors for the fixed income mutual funds, I also tend to favor floaters with shorter duration.

So based on the above criteria and in view of the possible rise in interest rates, I was able to find the following funds

Some selections
Templeton Floating rate retail growth – The fund has been around for 5+ years, has beaten the index by around .5% and has 425 crs under management. Majority of the fund holding is in AAA securities. The major downside is that it charges 1% as management fees.

Birla sunlife floating rate LT retail growth – This fund has been around for 6 odd years, beaten the index by around 1% and invests in AAA securities. An additional point is that the fund charges .44% as management fees which allows the fund to deliver better returns to the investor compared to other floating rate funds. The downside is that the fund does not have as much asset under management (around 150 crs)

HDFC floating rate income LT – This fund has been around for 7 years, has beaten the index by around 1%, and invests in AAA securities. In addition the fund charges only .25% as management fees and has  fairly high asset under management (around 850 Crs). This fund clearly seems to be better among the lot.

ICICI prudential LT floating rate B – The fund has been around for 6 years, has barely beaten the index and charges 0.85%. In addition the fund is fairly small, less than 100 crs in asset.

Kotak Floater LT G – This is one of the largest funds with around 18000 crs in asset. The fund has beaten the index by around 0.6%. In spite of its large size, it charges around 0.5% as management fees.

The above list clearly shows that the variance in the performance between the funds is low as expected. As a result, it is critical to choose a low cost fund which is difficult as all the funds clearly charge too much compared to the value provided. If one nets out the cost, the return is almost same as the index for most of the funds.

The conclusions are obvious
–        If you want flexibility and ease of transaction, select a low cost fund such as HDFC or kotak.
–        If you have the time and can put the effort of going to a bank and don’t need the liquidity, then it makes sense to buy short duration fixed deposits with good banks and keep rolling them. As a result when the interest rates rise, you will be able to take advantage of the higher rates.

What am I doing ?
I am using option 1 for myself and option 2 for my parents.