Which ETF Has Lowest Cost and Tracking Error?

Actual Question:

Which are the index ETFs in India with the lowest cost and tracking errors?

Answer:

Dear Friend!

Thank you for posing the valuable question.

My answer is that I have not gone into researching these two aspects as in my opinion the outcome of such a research may not yield any significant benefits as the variance maybe minimal.

Now let us take each point individually.

Lowest Cost of ETF:

While there is a huge cost difference between an actively managed mutual fund and an index fund or an Exchange Traded Fund (ETF), competition generally will force the cost difference within each class to be negligible. To elaborate, the annual management fee for an actively managed mutual fund is between 3.00 to 4.00 percent. The fund management fee for index funds and ETFs is below 0.50%.

When we are talking about a very, very long time horizon of investments of a minimum of 30–35 years, for ETFs internally compounding at over 15% per annum, generating an unimaginably huge wealth by the end of that period, a difference of 0.01 to 0.02 percent between various ETFs is not going to matter much.

Lowest Tracking Error:

Basically tracking errors arise when there is a time difference or gap between the change in the index and implementing the corresponding change by the ETF in its own fund.

Again as already explained, small tracking errors are not going to impact the results in any significant way.

What the investor shall actually focus on:

What the investor should actually focus on is work on own temperament and mental framework with respect to the following important aspects of investment:

1. Incase of small monthly investments, making investments with strict discipline every month, over such long periods like 30–35 years.
2. To follow the rule, “invest first; spend next” over such long periods.
3. Keeping investments absolutely intact, without disturbing, selling or liquidating for 30–35 years.

Thank you,

With Best Regards

Anand

Which Mutual Fund to Invest When Market is High?

Young investor at cross-roads, confused which type of mutual fund to choose.

Actual Question:

Which Category of Mutual Funds Should be Invested lumpsum when Market Is At High Level; Debt Funds or Liquid Funds?

Answer:

Dear Friend!

A very good question indeed! Thank you.

If a person is talking of mutual funds, it generally means that person does not the time or knowledge or interest in making own in vestments. For the person who makes self investments in stock will find a few good stocks available at attractive valuations even when the market is high. I bought ‘six stocks’ yesterday when the BSE Sensex reclaimed 30000!

Therefore, if agree that the individual is considering mutual funds as she or he does not the time or knowledge or interest in making self investments, then it does not matter whether the market is at a high or low. Such individuals must invest at all times in stocks through ‘dollar cost averaging’.

Now let us examine which type funds to invest. Before we delve into details, kindly understand that each category of fund is designed for an exact and specific purpose and one can not consider the funds loosely.

Debt Fund:

A debt fund is meant for an individual or organisation which has a huge corpus or lump sum and requires regular income for the running or maintenance. For example universities like the Harvard and Oxford are endowed with huge donations by successful alumni and other philanthropic person. The universities also have huge running costs. Therefore they should invest in debt funds or any other regular income generating source.

Similarly, suppose an individual inherits a billion dollars in cash, he or she should invest the corpus in funds that give regular income. Another example for an individual with a large corpus is a retired employee. Suppose on retirement the employee got a large corpus as retirement benefits (provident fund, gratuity and so on) and the retiree requires a regular income, then the corpus should be invested in a debt fund.

Therefore a small lump sum in a different situation is not suitable for debt fund.

Liquid Fund:

A liquid fund is designed for corporations and other business organisations who come into possession of a huge sum temporarily and the money is required to be deployed for other purposes soon, and in the interim the organisation does not want the money to lie idle but earn some income.

Let us assume that a company has raised a b billion dollars by issuing shares to the public. Let us also assume that the object of the share sale is setting up a mega steel mill with a captive power plant. It is going to take many years for the project to be commissioned. What will the company do with the billion dollars? For this situation the liquid fund is designed. The fund generates some regular income and also offers the flexibility (since it is liquid) to redeem any portion depending on the company’s needs.

Equity Growth Fund

Debt and liquid funds are not meant for young or early middle-aged persons who are building their careers and have to build wealth and retirement solutions, having scope for a long, active-income generating capacity. ‘Equity Growth Fund’ is the only option for them.

I once again thank you for raising this important question and I hope I was able to clear your doubt regarding which mutual fund to choose to invest a lump sum when the market is high.

With Best Regards

Anand