Mutual fund Sahi hai!
The onslaught of advertisements to buy mutual funds were at its peak in the advertising extravaganza festival called IPL.
In a match of 20 + 20 = 40 overs, 68.45% advt of ‘Mutual fund sahi hai’ is Wow. This % is my guessed figment of imagination.
The target audience is varied, and the total addressable market is immense, as I discussed in my first post of this series.
Three young guns from Mumbai, whose story you read in the second post of this series, are getting interested in MFs, but that is because of yours truly.
I successfully convinced them to show them the way to prosperity, love and eternal peace 🤘🏼😎.
In this post, I will attempt to answer these questions
- How to choose a mutual fund
- When to buy the fund
- How to buy that chosen mutual fund
- What to expect after buying and how to track your investment
After I clarified to the young guns in last post and promised to help them with MF hunting, I slept over it for a month, or two. I need rest I tell you. I am a very busy guy… phew.
Then I called them and started the conversation.
Ena was first to shoot.
Ena: Where do mutual funds come from? Malad or Dadar?
Me: Mutual funds or a better word is mutual fund schemes are products of a Mutual fund house.
Ena: Then what is a Mutual Fund house? That Antilia?
Me: Dude, Mukeshkaka has nothing to do with MFs, as of now. Mutual fund house is a body consisting of multiple entities. For simplicity, it’s the shop that sells mutual fund schemes. For eq., Franklin Tempelton, DSP Blackrock, Tata, Reliance, etc.
Meena asked if we can equate an MF house to a company selling cars — say Hyundai sells Verna, Xcent, i20. Maruti sells Swift, Ertiga, etc.
“”Correct”, I said and felt good that my mere presence is magical.
She probed further, “when we buy MF, what exactly are we buying?”
The Dushyant in me said, let me explain. Just like buying gold gets us gold in our hand, buying shares gets us shares in our demat account — A Mutual Fund issues Units.
The price of the unit is called NAV. NAV stands for Net Asset Value.
For simplicity, its formula is
NAV = (Total value of Assets of MF scheme — total cost incurred by MF scheme)/No. of units.
Deeka, who had done the analysis on MFs before, had a doubt beyond these. He was confused with the nomenclature of the schemes. Some words like Direct, Growth, Dividend, Focus, Small Cap, Regular, Monthly, etc were confusing him.
So, I thought of explaining some basic terms, seen with an MF scheme, and then proceed further.
I classified the MFs, based on certain identifiable parameters.
Type of investment — equity, debt, hydrid
Equity MFs invests in shares. Sub categories are large-cap, mid cap, small cap, diversified, thematic, and so on.
The name generally signifies that scheme’s investment philosophy. A large-cap equity fund invests majorly in large-cap shares, a pharma fund in pharma shares, and so on.
Debt funds invest in bonds and fixed maturity instruments. Sub categories are short term, long term, ultra short-term, liquid and so on.
Hybrid funds are a mix of equity and debt, in different proportions.
Type of return — dividend or growth
The payout to the investor by the fund can be by
a) the sale of units
b) dividend payout + sale of units
For eg., Ena has 100 units of dividend type of scheme, and value of each unit is 200, as of today.
Suppose, tomorrow, the scheme announces its dividend of 1 rs per unit, its NAV decreases by 1 rupee, and the dividend is paid to Ena.
Post payout, the value of unit becomes 199. If Ena sells his units tomorrow, he will get 199 rs per unit.
The growth type of scheme does not give the dividend. The holder has to sell the units to get the payback.
With or without distributor/agent
The scheme can be bought directly from the mutual fund house — hence the name ‘direct’. or through an agent/distributor, known as regular (don’t know why).
Each scheme offers direct and regular option, the former is cheaper by 0.5 to 1.5%, as the cost of commission to agents is not incurred by the fund house when bought directly from them. This saving to fund house is passed to investors.
Two examples of mutual fund schemes and how to decode it:
Reliance Small Cap Fund — Direct Growth
This is a scheme offered by Reliance Mutual fund. The name suggests it intends to invest in small-cap shares, the return will be by selling the units and it’s directly sold by the fund house, without an agent.
Edelweiss Large Cap — Regular Plan — Dividend
Its a scheme offered by Edelweiss fund house, intending to invest in large-cap shares. The scheme is through agents, and the dividend will be paid.
Point to be noted my lord, each scheme has these variants of dividend/growth and direct/regular. Exclusive dividend-only, or through-agents-only schemes are not available, as of now.
The young guns were getting the hang of it, so we took it to next level.
How to choose a mutual fund scheme
On my screen, I opened www.moneycontrol.com. They were familiar with this site.
Next was the mutual fund section.
The above picture shows the table and various categories of fund, classified based on their investment philosophy.
Other columns convey returns, which we will discuss in a bit.
I told the young guns that I will explain the procedure in one category than you will have to take it forward. Select one category.
Let’s select ‘Small and mid cap’, Deeka said. Others were OK with it.
In the above picture, I clicked on ‘Equity’, followed by ‘Small & Mid cap’, which took me here (This is the direct link to this page).
Above listing shows the list of schemes, sorted based on its 1-year return, from top to bottom.
This is where you have to start the analysis.
Let’s take the one and open in new window, say ‘Axis Mid cap Fund — Direct (G)’.
Scroll a bit, and you will see this section, just below the graph.
This section is crucial for deciding the health of a scheme.
Important points to observe here are
- No. of schemes in this category — See the third line from bottom left. It says there are 143 Small & Mid Cap schemes
- No. of periods — Smallest is 1 month, largest is 5 years.
- Returns — Returns with less than 1 year period are absolute, and than beyond 1 year are annualized. Means? A 2-year figure is double in absolute term, three times for 3-year figure, and so on. So, 12.7% of 3 years, means its absolute appreciation is 12.7 x 3 = 38.1%. The yearly figures are for easy comparison, as investments are typically gauged on its yearly returns.
- Rank — Among these 143, this particular scheme was in more than 50% in 5 out of 6 periods, and for recent 4 periods, it’s in top ten in almost all four.
- Absolute returns — The right side of the image shows the absolute performance of the scheme of quarters of past years. This can be used to gauge how the scheme performed vis-a-vis market.
Coming back to the same page, scroll down and you will see ‘Investment Information’. It gives information like size of fund, fund manager’s name, details of exit load, etc.
There are other sections like Performance comparison, portfolio information and peer comparison.
Such analysis gives you an overview. For how many schemes should be this done? As many as you can, when you are doing it for the first time.
Select schemes from different horizons.
Click on top and it will sort accordingly. Open multiple schemes in separate tabs and try to see them in parallel.
One should eventually be able to get a list of 2/3 schemes, which stands in top 20% of the category, across different periods.
Say, as of 5th June 2018, in Small and Mid cap, Axis Mid Cap Fund - Direct Plan (G), SBI Focused Equity Fund — Direct Plan (G) and Aditya Birla Sun Life MNC Fund — Direct Plan (G) are such schemes, which are in top 10% of its category, in periods of 1 month, 3 month, 6 month and 1 year.
When invested in such schemes, chances of appreciation are better.
Next question,
When to buy?
When a mutual fund is bought, also plays a significant role in return on investment. As a thumb-rule, NAV of a scheme follows the trend of its corresponding benchmark.
For eg., a large-cap fund generally follows the trend of Sensex benchmark.
The proportion varies — but a good scheme does not fall as much as the benchmark falls, on a given day, and rises more when the benchmark rises.
So, one should buy when the market is at its bottom.
That’s easy right? I asked.
By now, the young guns had guessed that its anything but easy.
I further preached them that people have lost their sheep, sleep and wealth in timing the market. Correct timing and taming the market is an art, is a science and a commerce.
Bullseye everytime is very difficult, but some indicators can help.
When the P/E ratio of the market is less than 21 is a good indicator. Its readymade graph can be found here.
What is a PE ratio and how it is calculated… that’s your homework.
Another such indicator is 200 days moving average. If the current value of the benchmark is less than that, it’s definitely a good time to buy.
Nifty, Sensex, Mid Cap Index, Small Cap Index and various others can be seen for respective categories.
One example, look at the moving average for Small Cap Index.
Your Honor, as on 5th June 2018, the Nifty Small Cap Index is less than its average of 30, 50, 150 and 200 days.
What we have to interpret is the Small Cap market is down from its 200 days average, so its ‘relatively’ cheap. It, infact, is ~5% away from its 52 weeks low. Relatively, a better day to invest.
Ena asked, “But how to be sure that its the right time?”
“It’s a calculated guess. Few indicators as mentioned above help. There are other advanced indicators too, which I am not aware of, right now.
That’s why, it is always advised to distribute your investment across a time horizon, so that the chances of buying at better price increases.
The mutual fund house facilitates you to stagger your investment across a time interval, through a mode called SIP (Systematic investment plan). When enrolled in an SIP, you invest at fixed intervals like every month, twice a month, etc.”
Deeka asked, “But what if I already know that the market is overpriced. Even then should I keep buying?”
Again a tricky question, I said. We don’t know the future. This overpriced market might rise still more and appreciate your investment or the market could go down.
The key is you are outsourcing these exact tricks and intricacies to your mutual fund. That’s what they charge you for. They analyse numerous companies on various factors and invest on our behalf.
Buying an MF scheme at lower rates definitely helps, but don’t keep waiting always for that.
A mix of both approaches could be that from your total goal, let 25–35% go through SIP route, and rest, you can stagger yourself by buying at those times, when you feel the market is low.
At the risk of sounding repetitive, I will reiterate that timing is difficult, but you will be better through persistence.
How to buy the chosen fund?
As I mentioned before, the scheme can be bought from an agent, by paying an upfront fee, or indirect commission. Or, one can buy directly from the fund house website.
Direct investment:
The user interface of the Mutual fund site is intuitive to guide you for your first transaction. You will need your PAN, bank details and certain other basic information handy, to complete the transaction.
If your PAN is not KYC compliant, you will have to visit once to your preferred MF’s office. Once the KYC is done for one MF, it gets linked to your PAN, and all MF houses can access the details.
When investing for the first time with an MF house, they create a ‘folio’.
What an account is to a bank, folio is to your MF house.
It holds your investment. Like bank accounts, you can have multiple folios. You can have multiple applicants in a folio and also assign a nominee, just like a bank account.
There are sites/apps which claims to facilitate and bring everything at one place, but it won’t let you buy direct funds. It’s as good as buying from an online agent.
There is MF Utility, which allows buying direct funds of multiple fund houses. I haven’t tried it.
If you prefer offline, you can visit the office of the mutual fund itself or offices of CAMS & Karvy.
Through agent:
Personally, I have my reservations for agents, mainly because of the types I have encountered.
The three guys I met, none could go beyond 3 questions. However, that’s my story.
I also have heard of people trusting their agents and getting excellent advice.
Nothing much for me to say here.
Ok, so now you have plunged and invested. What next?
Of course, take rest as this is MF, the magic stick which will fetch you tons of money.
No Sirs and Madams, you will have to track the progress.
You trusting your MF for equity and debt investment is outsourcing and the due diligence will be done by the MF, but how your scheme is performing is to be watched.
One can insert the investment transactions in online portfolio provided by sites like Moneycontrol, Economictimes Valueresearch, etc.
It helps to see the investment in one place, and more importantly, the latest values are always updated.
One should monitor the rank of a scheme, how it fluctuates when market shakes, how it is doing in long term, is it consistently in top range or bottom range, is it rising as per your expectations, and so on.
This will help you decide whether to invest more, keep the investment or redeem it.
I spend ~10 minutes a day, 5 days a week, on my portfolio. I find it sufficient.
A complete leap of faith on MF, without monitoring, won’t fetch the best of result.
The young guns were happy now and convinced to move ahead with their ABC of financial planning.
I gave them these closing remarks
“Bhaktjano, create financial goals, gauge your surplus, understand different investment instruments through various lenses, spread your investment as per your goals.
Don’t be lazy and let your surplus rot in savings account.
Don’t be blind, watch your investments.
Beat inflation.”
Hope you liked it.
I hope and wish that my ramblings would help. The goal of these posts was to hold those hands which are thinking to invest somewhere, but clueless — a state I was in once.
Today, I have moved only a bit. There are lot many things still to explore — other investment instruments, other advanced parameters, more methodological way, etc. Hoping to reach somewhere.
Please provide your feedback in the comment section. It will help me improve. You can also email me at dhruvdesaai@gmail.com.
