The Formula For Finding The Best Mutual Funds

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Everyone knows the power of mutual funds. It's the best and the most effective tool for wealth creation. A disciplined investment in a mutual fund via Systematic Investment Plan (SIP) can turn all your long-term  and short-term financial goals into reality. Though we have understood the importance of mutual funds it still remains an extremely complex concept to understand. If you want to invest in a mutual fund you will be confronted by questions like - direct or regular? Dividend or growth? Equity, debt or hybrid? Eventually, you have to seek help and go along with what your financial advisor suggests. This is not to suggest that seeking help from an expert is wrong. In fact, it's the smartest way to manage your investment. However, it is always good to have the working knowledge of the instruments you are investing in.

 

Let's take a look at things that you need to check before investing in any mutual fund.

 

Check Out The Performance Ranking

 

More than the performance of any mutual fund its ranking should be the first thing you look at. You can do this by checking the quartile ranking of any fund. Quartile ranking provides a clear idea of how the fund has performed on the quarter on quarter basis among its peer group. Each quartile contains 25 percent of all the funds. If a fund remains in the top quartile most of the time it is a clear indicator that the fund is performing well. Also, keep checking the performance of your fund periodically. If your fund is out of the top 25% repeatedly it means that it's time to move to a better fund. You can find all the data and the rankings in the factsheets that all the Asset Management Companies (AMC) publish on their websites. Sites like Moneycontrol and Value Research Online have all the data.

 

Watch The Ratios & Alpha Of The Fund - Ratio analysis is extremely critical. Check out the ratios like standard deviation and Sharpe ratio to get an insight of the fund. This activity also helps to narrow down your options. Along with ratios analysis, always ensure that you check the ALPHA of the fund. Alpha is an indicator of the fund manager's performance. It shows how the fund manager has given returns out of a given portfolio compared to the fund's benchmark. In simple words, alpha is the performance rating of the fund manager. It provides an indication of how often the fund manager has produced positive alpha in last few quarters.

 

Total expense ratio - Expense ratio is an important thing which you have to look at while reviewing any fund. The expense ratio is the ratio of all the expenses that the process of fund management and distribution causes. Higher expense ratio means the AMC is spending too much money on operational activities and it will eventually have to borne by the investors. To put it simply, high expense ratio will hamper your returns. To regulate the expense ratio, SEBI has capped mutual funds total expense ratio. As an investor, it is always better to choose a fund with lower expense ratio.

 

Who’s The Fund Manager? - A fund manager is the captain of the ship. He plays a critical role in how the fund performs. Managing a fund is a process-oriented approach, but a fund manager brings his/her personality and financial discipline to the fund. He/she is the final decision maker for all the buying and selling that goes into the fund. As the fund manager plays such decisive role, SEBI has made it mandatory for all the AMCs to disclose the names of the fund manager in the fund's factsheet. As a responsible investor, you should always be well-informed about who is the fund manager of your fund and his/her track record. It helps to analyse the performance of the funds that he/she has managed or is currently managing. You needn't panic if the fund manager of the fund has recently been changed. Such reshuffles keep happening in all the fund houses. However, if you feel that due to a change in the fund manager there is a notable change in the fund's performance then you consider exiting the fund.

 

Size Matters - Bigger The Better - The asset size of the fund makes a lot of difference. The bigger the size of the fund better it is for the investors. The fund size of debt and equity funds have a huge difference. Debt funds usually have thousands of crore of the asset under management (AMU) while for an equity fund with a few hundred crores is considered good size. In fact, 90 percent of total assets of the mutual fund industry is invested in the debt market. The point is that your scheme's assets should have a considerable AUM. Less AUM in any fund is deemed risky as you have no knowledge who the investors are and what is their quantum of investments in the scheme. If any big investor exits the fund there is a possibility that it might hamper the performance of the fund.  Whereas the funds which have a bigger AUMs can easily absorb such bumps.

Union Budget 2018 & Healthcare Insurance

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Insurance is one of the key elements of personal finance. A perfect tool to mitigate the risk of life and health which enables you to stay focused on your objective of wealth creation. To encourage people to buy insurance the government, through IT act, provides various concessions if you spend on life and health insurance. You can save a plenty of tax if you are paying for insurance on the regular basis.

In the union budget 2018, insurance was the focal point. Finance Minister Arun Jaitley gave a bumper surprise to the insurance sector with the proposal of the new healthcare scheme. Though the budget received quite a flak from the middle class and the investors, the big insurance scheme was one of the highlights of Budget 2018. Needless to say the insurance sector was jubilant with the announcement.

The government has already given subsidised insurance cover to all the citizen under the schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY). Through its earlier initiatives, the government had made its intentions clear of focusing on the health care. With the announcement of the new scheme - National Health Protection Scheme, the government is promising to provide health insurance cover worth Rs.5 lakh per family to over 10 crore economically vulnerable families. PM Modi has proclaimed that NHPS is world's biggest government-sponsored healthcare scheme. The government has allocated Rs.2,000 crore for NHPS. The scheme will be implemented jointly by the states and the centre where the centre will bear 60 percent of the cost while 40 percent will be borne by the states.

 

Why Healthcare & Insurance Is Important?

NHPS is focused mainly on giving a health cover to the marginalised and people living Below Poverty Line (BPL). Hence, if you are financially well off you are not the beneficiary of this scheme. However, let's take this opportunity and try to understand why healthcare insurance is so important. The healthcare facilities are extremely expensive in our country. If you don't have health cover you are exposing yourself to high risk.

As we discussed earlier, insurance plays an important role in risk management. It is the binding glue which holds your personal finance together. Let's try to understand this with an example. Rahul is working professional and earns a handsome salary and has bright financial prospects. He is steadily marching ahead to achieve his financial goals. Unfortunately, he meets with an accident which causes serious injuries. As a result, Rahul is bed-ridden for next 6 months. Naturally, he doesn't get a salary for this period and he also has a fat pile of medical bills to take care of. But as he is a smart investor and planner, he had made the provisions for such occasions by buying a health and accident insurance. He also created an emergency fund. The accident insurance takes care all the medical bills and he draws a monthly salary from his emergency fund.

Imagine had he not got the insurance coverage he would have had to pay all the bills from his pocket. That would not only have set a huge financial hole in his account but would also have given a severe jolt to his financial plans. The important thing we learn from Rahul is that in order to safeguard your's and your family's interest it's always better to get adequate insurance cover for your life, health and automobiles.

 

Added Advantage - Tax Benefits

The principal goal of insurance is to give you a risk cover but there is an added advantage of buying insurance - tax saving. To encourage people to buy insurance the government gives some tax grants to those who pay insurance premiums in a disciplined manner. Under section 80C, 80D & 80DD you can claim these tax deductions. If you are paying premiums for a life insurance policy then you can claim up to Rs.1,50,000 deduction under section 80C. For health insurance, you can save income tax based on costs incurred for precautionary health check-ups during the term of the policy. The limit of tax exemption under Section 80D of Income Tax Act is Rs.25,000 if you are under 60 years of age and Rs.30,000 for senior citizens. It is the same for all the income tax slabs. You can also claim further benefits of coverage for preventive health check-ups of up to Rs. 5,000 every year.

Personal Finance: The Science Of Money Management

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Personal finance is the system of regulating finance of a person or a family. In simple terms, personal finance is the way an individual or a family earns and makes provisions for spending and investing. Personal finance is planning all your monetary resources over time while taking into account events of the future, risks, your financial goals and intelligent allocation funds to meet those goals (Investment). The key components of personal finance comprise savings accounts, salary account, personal loans, consumer loans, credit cards, insurance and investments.

 

Critical Elements Of Personal Finance

Watch Your Cash flow - The most important part to be successful at money management is to have robust cash flow. Let's understand what it really means. When you plan your personal finance you have to take into reckoning the monthly expenses like EMIs, rent, SIPs, insurance premiums, service bills, fees, subscriptions, etc. To manage all these expenses you need to have money, and after footing all these bills you need cash on hand to ensure your household functions smoothly. Hence keeping a good cash flow is the primary and one of the most crucial steps of Personal Finance.

Get A Good Insurance Cover - Insurance is an important part of personal finance. It's a tool for risk management. An adequate insurance cover for yourself and for your family helps to keep your cash flow smooth and unhindered as it provides monetary support if some unfortunate event occurs. If you are the sole earner of your family then you should have a term insurance of an appropriate cover for yourself and health/medical cover for yourself and your family. However important insurance may be, never make a mistake of looking at insurance as an investment instrument. Insurance is only to mitigate the risk of the unforeseen events of future. All the moneyback insurance policies that are projected as investment mediums don't give good returns.

Plan Your Taxes -  Make sure you plan your taxes well in advance. Most of the people make the blunder of investing in tax-saving plans at the last minute. Investing in haste not just beats the purpose of tax planning but, most often, induces you to sign up for wrong and unproductive investments. As a smart investor, it is your responsibility to reduce your tax liability by making good use of all the tax-saving provisions prescribed by Income Tax Act. Your best foot forward is to choose the best tax-saving scheme that not just helps you save tax but also bring handsome returns. As tax is a difficult subject to comprehend, it's wise to take help from your tax advisor to plan your tax and stick to the plan throughout the year.

Debt Management - If not planned well, the debt could grow into a big hindrance in reaching your financial goals. Debt is a complex matter, everyone has to take a loan sometime or other. In a way, it is inevitable. But then it becomes important to see to it that we do away the debt burden as early as possible. Always be disciplined in paying your loan. It serves two purpose - you lessen your liability and timely repayment boosts your credit rating. As mentioned earlier that sometime or other you have to opt for a loan, the best way is to get the loan at the lowest interest rates. Personal loans have high interest rates while gold loans have a relatively lesser interest rate.

Savings & Investment - The final frontier of Personal Finance is saving and investment. The very objective of you planning your finance so carefully is to achieve your end goal - wealth creation. Saving and investing are the means which will slowly but steadily take you to your long-term and short-term financial goals. For all your short-term and long-term needs you need to invest in investment instruments which give best returns. For a retail investor, there are various investment mediums like real estate, gold, mutual fund and equity investment to choose from. Choose the right investment medium and be disciplined in investment.

 

Sounds Difficult? Ask The Expert

Personal finance has all those elements that people like to stay away from. It talks about investment (stock market, mutual fund), tax, insurance, monetary discipline, etc. which people generally find boring. Hence, to be in control of your personal finance, you can approach a licensed financial advisor or a wealth manager for support. As discussed above, the most critical feature of personal finance is the investment, it can become rather tough for a novice to find his/her way through the abundance of funds, stocks, schemes, etc. A certified financial planner or if you want to invest in the stocks, a stock advisory firm, can bring great value to your investment portfolio. Always remember, paying for a valuable advice is also an investment.

Bitcoin Or Equity - Who’s The Biggest Wealth Creator?

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In the recent time you must have the word 'Cryptocurrency' quite often. If you are not into finance and economics you must have wondered why Cryptocurrencies have become such a buzzword. Such was the frenzy about the Cryptocurrencies that it created curiosity amongst all the people alike. The stories of how Bitcoin created wealth for investors started to fly around. In a year, it went from $4,000 to $19,000. But the question still remains - what is Bitcoin & what is Cryptocurrency? Without much ado, let's try to understand what is Cryptocurrency and most importantly, whether you should invest it.

 

What Is Cryptocurrency?

Cryptocurrency is a digital money which is created to be extremely secure and anonymous. Cryptocurrency is a currency connected with the internet that uses cryptography. Cryptography is the study of a system for the secure communication. Basically, it is a process of converting decipherable data into a virtually uncrackable code to track purchases and transfers. In a way, Cryptocurrency tries to be extremely safe and secure. That is one of the reasons cryptocurrency is being deemed by many as the money of the future. Today, cryptocurrencies, notably Bitcoin, have become a global sensation known to most people.

 

Can Indians Invest/Trade In Bitcoin And Cryptocurrency?

The acceptance of Bitcoin for online shopping and transfer is illegal in India, but, if you want to gain from the volatility of the cryptocurrencies, your best bet is trading cryptocurrencies. In India, there are various Digital Currency Exchanges which help you to trade in cryptocurrencies. Forums like Zebpay and Coinsecure provide trading terminals for not just Bitcoins but various other cryptocurrencies. All these exchanges adhere to a strict self-regulatory code of conduct which makes it obligatory for all the traders to be KYC compliant for which they have to produce their PAN card, Adhaar Card and bank details when they sign up.

Things To Remember - Trading in cryptocurrencies is like trading in equity or commodity, totally legal. Having said that, traders should be greatly cautious and diligent while trading. Cryptocurrency market is known to be remarkably volatile. The exponential volatility of Bitcoin skyrocketed its value from $1,000 to $19,000 just in a timeframe of a year and then brought it back to $9,000, a month after hitting the all-time high level. In this kind of trading, you stand to earn a lot but always remember the downside is equally steep.

 

Cryptocurrency Trading Better Than Equity Investment?

Cryptocurrency and equity are extremely different to each other. One is a regulated and an organised asset class while the other is a decentralised and a new age asset class. But taking into account the popularity of Bitcoin, we have to pit these trading mediums against each other to understand which one fares better.

In equity, investors get to invest on a long-term basis and explore the full potential of the company. If you are absolutely convinced about a particular company or the business model, equity gives you the chance to become a stakeholder in its success. To identify the potential of the business, there is a methodical analysis to determine the strong points of the business and for risk management. Therefore, to a large extent, equity investment is safe, secure and rewarding.

Cryptocurrencies, on the other hand, are not safe and secure. But if you play your cards right, they can be very rewarding. At this point, there are very few people who have the working knowledge of how the price Cryptocurrencies moves. Currently, people are trading in the heavy volume essentially because they are the victims of the FOMO (Fear Of Missing Out) effect produced by media frenzy across the globe. In early January, Bitcoin surged manifolds giving high returns to the traders. But soon the price of Bitcoin and many other Cryptocurrencies corrected considerably. Not many people saw it coming as there is no systematic method to analyse the future potential of Cryptocurrencies. Furthermore, there is also a question about the legitimacy of Bitcoin. Many countries, like India, have yet not acknowledged it as a legal tender.

Turn Your Tax Saving Into High Return Investment

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Every year the tax declaration becomes a pain in the neck of those who don't plan their taxes throughout the year. As result, to meet the stipulated deduction limit such people invest in any of the prescribed investment instrument in a haste. This approach will do you more harm than good. To be on the top of your game, you have to plan your tax just like your investment. It has to be timely and systematic. The point that many people miss in their tax planning is that the Income Tax Act gives them various windows of opportunity to not just save tax but get handsome returns. To make most of it, let's shed some light on all the ITA tax saving provisions and how to get the best out of them.

Section 80C is one of the best and the most used tax saving windows. Here you get various investment options to choose from. However, not all them give good returns. Hence, while selecting investment mediums one has to exercise utmost caution and diligence. Let's do a critical analysis of all the available options and which one you should go for.

 

ELSS - The Best Tax Saver

Equity Linked Saving Schemes (ELSS) is a mutual fund with lock-in period. In ELSS, just like in a mutual fund, your fund managing company pools your's and other investor's money and invests it across sectors in the stock market. A bigger pool of money attracts big returns, on the other hand, the losses get spread out. The salient feature of ELSS is that it has the lock-in period of 3 years which is less than any other tax-saving medium. For the tax saving reasons, ELSS becomes very attractive. By investing in it you become eligible for tax relief under Section 80C and you also stand to gain good returns. Other Mutual Funds do not offer tax benefits.

Investing in ELSS is as easy as investing in mutual fund. The best part of ELSS is that it gives better returns than all the tax-saving mediums that are prescribed by the Income Tax Act i.e. PPF, NPS, ULIP, etc. Under section 80C you the amount allowed for deduction is up to Rs.1,50,000. Thus it is a wise thing to invest that much amount in ELSS and if you have any surplus amount you should invest it in an open-ended mutual fund which offers more growth and high liquidity.

 

Public Provident Fund (PPF)

PPF is the is the most stable and dependable investment scheme as it is run by the government. However, PPF investment comes laced with some strict conditions i.e. 7 years lock-in period plus certain limitations on the amount of investment like you can only invest up to Rs.1,50,000 in a year. The reason it is one of the most popular tax-saving tools is that it gives compound returns. Under section 80C you can claim up to Rs.1,50,000 deduction by investing in PPF. It is advisable that to get the tax benefits some portion of your income should be invested to PPF. However, points to remember are - PPF provides fixed returns and the interest rates get reviewed, often slashed, from time to time. PPF should only be looked at as a tax savings scheme and not a wealth creator.

Opening a PPF account is an extremely simple process. You can open it at a Post Office or at a nationalised or private banks i.e. State Bank of India, ICICI Bank, Axis Bank, etc. As PPF is supported by the Government and gives risk­-free and fixed returns it keeps your capital safe and growing.

 

Tax-saving Fixed Deposits

 If you are looking for a shorter lock­-in period and at the same time looking for a guaranteed return along with a tax­-saving option then fixed deposit is just the option you are looking for.

Opening an FD account is extremely simple. You can do it online as well as at a bank branch. The interest rates are different for different banks. However, a point to note here is that the rates are not going to be much different (higher) as FDs are know to give fixed but moderate returns.

The biggest feature of the tax­-saving fixed deposits is that the interest rate remains the same throughout the period of 5­ year. The rates of interest for Indian citizens, Hindu Undivided Family (HUF) and NRIs varies from bank to bank. Usually, it starts from around 8 percent in most of the banks. Senior citizens and bank staff members get higher interest rates. The interest earned on the tax-saving FDs is taxable and it is deducted from the source. Like in all other tax savers, in FDs, there is a minimum investment amount condition. You can deposit from minimum Rs.100 to the maximum is Rs 1,50,000 in a year.

Worried About Tax-Saving? Make It Profitable This Year!

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Every year, as the March starts approaching the thought of tax declaration start giving sleepless nights to most of the salaried and business people. As much as people hate paying taxes, they hate the complex terminology and the sections and subsections which follow. It's true, the tax is a difficult beast to understand. That is one of the reasons many people don't try to understand the provisions for tax deductions and pay the tax and be done with it. That's a wrong way to approach tax. To ease the burden on taxpayers, the government and the income tax act has provided several windows to save the tax. Let's explore all the avenues of tax saving.

Section 80C  of the Income Tax Act is the most popular tax-saving route. In this section, there are certain prescribed investment instruments which help to save tax. If you invest money in these specified instruments the government offers you certain tax concessions. You may ask why the government allows these tax sops. In the larger scheme of things, it is in the interest of the government to encourage the culture of saving and investment amongst the citizens. Section 80C, 80CCC and 80CCD are some of the sections which have a lot to offer. However, the maximum consolidated deduction under section 80C is Rs.1,50,000. The condition is that you have to do it a disciplined manner all through the year in the prescribed instruments.

Following are the investment instruments which are specified under section 80C, 80CCC and 80CCD

  1. Public Provident Fund (PPF)
  2. Life Insurance Premium (LIC)
  3. National Savings Certificate (NSC)
  4. Equity Linked Savings Scheme (ELSS)
  5. 5 years fixed deposits with banks and post office
  6. Tuition fees paid for children's education, up to a maximum of 2 children

The government, thought the prescribed investment mediums, is trying to build the culture of saving and investment. However, the thing is that not all the government prescribed mediums are good for investment. Let's take the example of investing in LIC. It will give you tax relief but it wouldn't be a good investment as the returns don't have the ability to create good wealth. Hence, it's incumbent upon investors to find the best and the most tax efficient investment means which not only save tax but also give better returns.

Let's find out investment instruments which save tax and also give good returns.

Public Provident Fund (PPF) - Is the most stable and dependable investment scheme. PPF is operated by the government of India. The problem, however, is that PPF investment comes with some strict conditions like 7 years lock-in period plus limitations on the amount you can invest like currently, you can invest minimum Rs.500 or maximum Rs.1,50,000 in a financial year. On the other hand, the point which makes it one of the popular tax-saving instruments is that it gives compound returns. Under section 80C you can claim up to Rs.1,50,000 deduction by investing in PPF.  In order to get the tax benefits, it's always better to have some portion of your income allocated to PPF. The point to remember is that it provides fixed returns and the interest rates get reviewed from time to time. Hence, it should be looked at a tax savings scheme and not a wealth creating scheme.

ELSS - The Best Tax Saver - There are many people how get confused about how is ELSS different from a mutual fund? Let's clear the confusion once and for all. ELSS is a mutual fund which has a lock-in period of 3 years. Equity Linked Saving Schemes (ELSS) is one of the types of Mutual Fund. It functions the same way as a mutual fund. Like in a mutual fund, in ELSS, your mutual fund company will pool your's and the other investors' money and invest it in the equity market (stock market). A bigger chunk of money will attract higher returns while the losses can be spread out. The point where ELSS becomes a little different than mutual fund comes with a lock-in period of 3 years. The condition is that you cannot exit the funds before 3 years. Even with that condition investment in ELSS an extremely attractive scheme. It has less lock-in period than any other tax-saving scheme and gives higher returns.

Exchange Traded Funds - A New Avenue Of Investment

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ETF Exchange Traded Fund

From fixed deposits to post savings to a mutual fund, Indian investors have come a long way in their quest for high returns. There are very few Indian investors who try their hand at direct equity investment as most of them are averse to taking high-risk investment. The mutual fund has hit the right cord with Indian investors because it perfectly channels all their needs - it is not as risky as the direct stock market investment and, most importantly, it gives handsome returns. The kind of returns FD and post can never match. But as we evolve, there are more and better investment mediums which keep coming. Exchange Traded Fund (ETF) is one such investment medium which has started gaining popularity. What is ETF? Is it as good and as safe as the mutual fund? Questions like these and much more have started to inundate investors mind. Let's explore all the facets of ETF and try to find out whether you should invest in it.

 

What Is ETF?

An exchange-traded fund (ETF) is a bundle of securities that you can buy or sell on a stock exchange through a brokerage firm. ETF is in almost all asset classes, from traditional investments like gold to new assets like equity, commodities or currencies. Such is the fluidity of ETFs that these days there is a buzz about an ETF on bitcoin. An ETF is a marketable security which is traded on an index like a stock a commodity, bonds, or a basket of assets like an index fund. One quality sets it apart from mutual funds is that an ETF trades just like a company stock on stock exchanges. The experience price ETFs keeps changes all through the day as per the shares (in equity ETF) are bought and sold. The biggest advantage of ETFs is that it has much higher daily liquidity and considerably lower fees than mutual funds which makes it an attractive alternative for retail investors.

 

Types Of ETFs

As we are comparing all the aspects of ETFs with that of mutual funds, the reasonable question to ask would be - like Mutual funds are there different types of ETFs? In mutual funds, we have equity funds, debt funds and balanced funds. As we mentioned above that ETF is like a basket of securities i.e. bonds, shares, bitcoins, etc. From this, it becomes absolutely clear that ETF is a flexible and a dynamic investment platform which means there must be more than just one type of ETFs. Let's find out the different types of ETFs. As ETF is still a medium which is relatively less popular, most of the ETFs mentioned below are not available in India but these are ETFs which are being traded in the US as well as in some foreign exchanges.

 

Market ETFs: Designed to track a particular index like the S&P 500 or NASDAQ

Bond ETFs: This ETF is formulated to give exposure to practically every type of bonds available i.e. the U.S. Treasury, corporate bonds, municipal bonds, international bonds, high-yield and many more.

Actively managed ETFs: This ETF takes an aggressive approach and tries to beat an index it is following. This is unlike most ETFs, which are meant to track the index.

Sector and industry ETFs: Like thematic mutual funds which focus on a certain sector and industry, this ETFs is designed to give exposure to a certain industry e.g. pharmaceuticals or information technology.

Commodity ETFs: Just as the name implies this ETF is created to track the price of a commodity, such as gold, crude oil, copper, etc.

Style ETFs: A style ETF tries to follow an investment style or focuses on the market capitalisation i.e. large-cap value or small-cap growth.

Inverse ETFs: This ETF is different than the conventional ETFs. Here the intention of the ETF is to gain from a drop in the value of the underlying asset or index or whatever security there may be in the ETF basket. This is comparable to taking a short position in the future's market.

 

Expense Ratio Of ETF Is lesser Than Mutual Fund

For both mutual funds and exchange-traded funds (ETFs) investors are charged an expense ratio. This charge is to cover the operating expenses of the funds. The expense ratio is a critical part. The expense ratio includes many operational costs i.e. administrative cost, distribution cost, compliance cost, management cost, marketing cost, shareholder services, record-keeping fees, etc. The sum total of all these costs accounts for a certain percentage of a fund’s average net assets. The expense ratio, which is calculated annually and published in the fund’s fact sheet and shareholder reports, has a straight impact on the fund’s returns to its shareholders. Hence, also on the value of your investment. In simple terms, the higher expense ratio of fund simply means you will take a hit on your returns. A heavy expense ratio can eat into your returns considerably. Normally, investors are not vigilant about this element but that's a big mistake.

The expense ratio of ETF is much lesser than that of mutual funds. As its operational cost is less it has the potential to give a higher profit margin.

 

Then Why Your Financial Advisor Doesn't Recommend ETF?

Now you must be thinking if ETFs are so good why your financial advisor doesn't recommend it to you? That's a good question. The answer lies in how much your financial advisory gets by recommending a certain fund. Financial advisers get compensated for their expertise either by the commission or by a yearly percentage of your entire portfolio. The cost normally ranges between 0.5-2%. It's the same way as you pay a yearly percentage of your fund to the fund manager. In order to skip the annual charges, if you exit the fund before finishing one year you have to pay a hefty exit load that ranges between, 1-3%, to the Asset Management Company (AMC). Therefore when you try to skip the annual charges, financial advisor receives his/her share through exit load. And if your advisor gets paid by the load then there is no surprise if he/she doesn't recommend ETFs for the commission they get from the load is far greater than ETFs. Even the money the AMCs make from mutual funds is way bigger than the revenue of ETFs. This is one of the reasons AMCs spend so much money on creating awareness about mutual funds and are, to some extent, apathetic towards ETF.