Are you a Mutual Fund Investor? You need to know this

“A wise man makes his own decisions, an ignorant man follows the public opinion”

Are you a Mutual Fund investor? And of late, have you began doubting your intelligence. Do not worry, practically all investors have the same reservations and anxiety.

We have a simple logic for this situation, the Indian stock market recently crossed the all-time high (11751), and formed a new high (11856) however, our investment portfolio is still negative. It is very natural that such circumstances will create doubt about our actions.

Now, before we commence our blog, let me give you some reinforcement-

“Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant”

-Warren Buffett

A Mutual Fund (MF) is one of the best tool available for regular investors who do not have time to track and follow stocks. Furthermore, people do not have the expertise to evaluate market movements correctly.

MF offers a diversification that is extremely challenging for an individual investor to create for himself. Along with MF, we have plenty of Investment options like Portfolio Management Services  (PMS) Alternative Investment Funds (AIF) Private Equity (PE) and so on. The average fee that you pay for each of the mentioned product is listed below:

• Regular Mutual Fund (1 - 2.5%)
• Portfolio Management Services ( 2 - 4%)
• Alternative Investment Funds (2.5  - 5%)
• Private Equity (Depends on Offering)

The minimum investment for each category is also different:

• Regular Mutual Fund (INR 500)
• Portfolio Management Services (INR 2.5 million or 25 lakh )
• Alternative Investment Funds (INR 10 million or 1 Cr)
• Private Equity (INR 50 million or 5 Cr) few merchant bankers do agree for smaller investments  

MF is the definite choice, simply because, they are fully transparent, highly regulated, and all the data is easily accessible to be verified at any given point of time, the expense ratio is relatively less and the minimum investment won't hurt anyone.

Now let us learn, how not to be a victim.

“Before you Invest, you should Investigate”

Do promise yourself, you won't proceed with any investments without reviewing the below mentioned 5 points

It is recommended one should always review the weather report before going for a trek, by doing this simple act, you can prepare yourself better. Similarly, these 5 points will help you make an informed decision,

1. Total Expense Ratio (TER)
2. Standard Deviation (SD)
3. Beta
4. Alpha
5. Sharpe Ratio (SR)

This is your hard earned money, hence, your responsibility to learn how your funds would perform during good and bad times. Invest only when you understand the risk, rewards and the time span.

Lets us begin the journey of Financial Education,

1. Total Expense Ratio (TER):

It does exactly what the name states. The total expense that a fund can make for all its activities (administration, distribution and management, other things) has to be within the TER.

Significance:

Suppose you decided to invest INR 1 Million or 10 Lakh in a Mutual fund that has a TER of 2%

You will pay INR 20000/. This is a fixed recurring expense and has to be paid every year irrespective of the fund's performance.

Do keep this in mind and check with your advisor about the TER before making your next investment. 

Why is it important?

If you invest in a product that has high TER, your investment value will depreciate without your knowledge and you will keep wondering why your fund does not increase when the market goes up.

2. Standard Deviation (SD): 

Do not let the name scare you. We won’t be calculating the SD, all we need to know is what does it mean, and how to apply the same.

It is very critical to be aware of SD. Because it shows how stable or volatile the fund is. MF is a collection of stocks and a simple average or mean won't give you the correct representation. SD gives an almost perfect prediction of how will your fund react during different times

Significance:

Suppose, an MF delivers 10% average returns and the SD of the fund is 12.

How should you interpret this data?

During the good times (Bull market), your MF can deliver returns as high as 22%

(Average return 10 + SD 12 = 22)

During the tough times (Bear market), your MF can go as low as -2%

(Average return 10 - SD 12 = -2)

Why is it important?

If we invest in MF that has very high SD, during a crisis our fund will bleed for sure. If we are informed of the SD, we can plan and mentally be prepared for the storm or worst case scenario get out of the fund and move to a safer option. 

This will ensure we do not have anxiety and feel cheated.

Now that you have understood SD, let us agree to apply this before making an investment and ask yourself are you ok with this kind of a fund.

Invest only if your answer is YES 

Remember, SD should not be considered in isolation, always combine it with Beta, Alpha and Sharpe Ratio.

I hope this topic has been engaging and effective so far, this might get a little heavy for my friends from different background.

Hence we will take a break and cover the following points Beta, Alpha and Sharpe ratio in the next blog.

Click here to read PART II

PLEASE NOTE:

ONLY INVEST THE AMOUNT, THAT YOU DO NOT NEED AT LEAST FOR 3-5 YEARS!!

Dear Readers,

This information is not from any textbox, it is what I have discovered over the years. The conventional definitions end up being too complicated. Furthermore, people do not understand how to apply the same. 

I sincerely hope, this will help you in the long run, keep this article and part II handy (bookmark) and refer to it each time you or your dear ones plan to make an investment. 

This blog is my personal attempt to help you.  If you found this article to be helpful, kindly share it with your near and dear ones.

I would be very glad to hear your feedback, in fact, it will motivate me to continue my journey of blog and teach.

Thanks and I wish and hope you make a lot of wealth from your investments.

All the best!! 👍👍👍

Cheers 🍹

Intelligent Investor 

PART II