Showing posts with label index fund. Show all posts
Showing posts with label index fund. Show all posts

Tuesday, April 25, 2017

Are Small and Mid-Cap Mutual Funds Good for Investment?

Tag showing Text  "Small and Mid-Cap Funds"


Actual Question:


Should I continue investing in Franklin smaller companies and an L&T midcap fund? How are these 2 funds for long-term investment?

I am 22 years old and currently I am investing in these funds through SIP 4000 each. And by long term I mean 10–15 years. Also if you can suggest some more funds to add in my portfolio since I can spare an additional 3000 SIP.


Answer:


Dear Friend!
I am sorry, I should point out two discrepancies in your present investment strategy:
Investing in small-cap and mid-cap companies.
It seems that you are investing in costly, actively managed mutual funds.

Small and Mid-Cap companies:

One should always invest in companies that are large. Why?
  1. In the first place, Large companies have become to that stature because they have some inherent strengths/ advantages.
  2. They can attract financial resources, when required, at competitive rates to implement major expansions, technological up-gradations, etc.
  3. They have the resilience to recover from major mistake in case they happen to make a few.
  4. At times of a market meltdown large and mid sized comapnies bear the maximum brunt. Large companies though affected escape with just bruises.

 In my case, when investing in shares directly, I make sure that the company has a minimum turnover of Rs.10000 crores (US$ 1.5 billion) and a market capitalisation of an equal amount. These companies will typically fall under the mid-cap segment, but are a select few with extremely good fundamentals. But mutual funds’ inclusion criteria are more biased towards considerations like price momentum, sectoral prospects, etc., rather than company fundamentals.

Costly, Actively Managed Funds:

Actively managed funds are funds that undergo frequent changes by buying new stocks and selling existing ones, with an purported aim of maximising returns. However history proves otherwise. The fund management fee charged for active funds ranges between 3–4% per annum. You can imagine the total fees charged by the fund over an investing period of 15 to 20 years!
Investor in mutual funds will benefit by investing in well diversified, low cost index mutual funds or exchange traded funds. The fund management fees for such passive funds are below 0.5% per annum.
Active and Dozing Mutual Fund Managers

Your Particular Situation:

Finally coming to your personal investment situation, I suggest that you stop your existing SIPs and start a SIP of:


Please note that I have not recommended the above based on any returns or performance but simply because:
  • They are low cost, exchange traded funds.
  • The fund are operated by large financial institutions that you can expect to be in business for the next 100 years
  • They are composed of the Top 100 Indian companies.


Suggested Further Reading:


Thank you,
With Best Regards
Anand



Friday, September 16, 2016

Index Funds of Top 10 Mutual Funds

Meaning:
Index Funds are passive mutual funds that track a popular stock index. Diversified index funds are recommended for investors who cannot afford to learn and invest on their own.

They are called passive because the fund manager need not actively manage the fund by way of frequent purchase and sale of stocks. Stock indices do not undergo frequent changes. Index funds that track popular indices, once constituted by buying shares of that constitute the index in exact proportion, does not require any change unless there is a change in the composition of the index, which is a relatively infrequent event.

Diversity contributes safety based on the principle that when we have a large basket of stocks (about 500 stocks) 80% perform average, 10% perform brilliantly and another 10% will prove to be total duds; overall such diversified portfolio will give reasonable safety.

Example:
We present here a list of index funds offered by ‘The Top Ten Mutual Funds of India’ ranked by the assets under management:

Name of Fund
Index Fund Available?

Name of Index
Number of Stocks
Diversified?
ICICI Prudential Mutual Fund 
YES
ICICI Prudential Nifty Next 50 Index Fund
CNX S&P Nifty 
50
POOR
HDFC Mutual Fund 
YES
HDFC TOP 200 FUND
BSE 200
200
REASONABLE
Reliance Mutual Fund 
YES
RELIANCE TOP 200 FUND
BSE 200
200
REASONABLE
Birla Sun Life Mutual Fund 
YES
BSL Top 100 Fund
TOP 100 By Market Capitalisation
100
SPARCE
SBI Mutual Fund 
YES
SBI NIFTY INDEX FUND
CNX S&P Nifty 
50
POOR
UTI Mutual Fund
YES
UTI - Nifty Index Fund
CNX S&P Nifty 
50
POOR
Franklin Templeton Mutual Fund 
YES
Franklin India Index Fund - NSE Nifty Plan
CNX S&P Nifty 
50
POOR
Kotak Mahindra Mutual Fund 
YES
Kotak Sensex ETF Fund
S&P BSE Sensex
30
POOR
IDFC Mutual Fund 
YES
IDFC Nifty Fund
CNX S&P Nifty 
50
POOR
DSP BlackRock Mutual Fund 
YES
Top 100 Equity Fund
S&P BSE 100
100
SPARCE
This list is not exhaustive. Funds may have other index schemes that may be more diversified.

Conclusion:

Even though the Bombay Stock Exchange has a well diversified, ‘S&P BSE 500 Index’, we are unable to locate an index funds tracking this index. Perhaps the reason is to cater to customer perception that top index companies are safer and will provide better returns. However, in reality it is a only a fund that tracks a well diversified index that ensures safety and growth.

Monday, June 27, 2016

Risk Comes from Not Knowing What You are Doing

Businessman jumping across the mountain taking risk
Businessman jumping across the mountain taking risk

Driving an automobile is Not Risky; driving, without adequate training is – not only to the driver but also to all other unsuspecting road users, and that is why my Guru, Warren Buffett said, “Risk Comes from Not Knowing What You are Doing”.

Often I have heard people proclaim, sporting an, “I Know Everything” smile, that they diligently avoid investing in stocks, as it is Highly Risky.  On questioning how they had come to such a conclusion, they would invariably attribute the wisdom to their parents, teacher, colleague or friend. When questioned where they would prefer to invest, they would retort, with authority, “Corporate Fixed Deposits and Bonds – Rock Solid Safety”.  Sadly, after a few years, I have seen many of them Loose both Capital and Interest, and repent their poor investment decisions.

The moral of the story is, Risk or the Lack of It, does not lie in any particular instrument, but lack of knowledge.  A fixed deposit with a government bank in India indeed is as solid as rock, there is no doubt, but with an interest rate around 7% per annum and inflation near or above the rate of return, the “Value” of your investment is bound to be eroded for sure, over a period of 15 to 20 years.

On the other hand, if an investor had invested Rs.1,00,000 ($ 1470) in “NIFTY 50” in January 1995 and had simply forgotten about it, today in June 2016, it would have grown to Rs.809,400, a growth of 709% or a Compounded Annual Growth Rate (CAGR) of a whopping 32.99% per annum.  Even after an assumed, high, inflation rate of 10%, the investor would be left with a net return of 22.99%, Compounded Every Year!  So, Where Does Risk Lie? Not in the “Instrument”, certainly, but in “Ignorance”.