#expenseratio

[blogthetortoise-blog]

Can zero expense mutual fund schemes work in India?

Fidelity Investments has just launched a couple of new mutual fund schemes with zero expenses for retail investors in the US. These are the first ever zero expense ratio self-indexed funds for retail investors available in the market -Fidelity zero total market index fund (FZROX) and Fidelity zero international index fund (FZILX). In India, SEBI has been making efforts to make mutual fund investment a viable proposition trying to bring down the expense ratio and to increase the take-home returns of investors. With regards Index funds, coming up with zero expense mutual fund schemes can be a practical thing. But applying the same in case of actively managed funds would be challenging and might even be unsustainable in the long run. The revenue model for zero expense mutual funds is to earn stock lending fees (SLB) on the underlying holdings. The problem is, the stock loan market is practically non-existent in India, and so zero-fee mutual funds are a non-starter. That said there are already several index ETFs in India that have an expense ratio in the range of 5-10 bps which can be considered as an alternative to zero-fee mutual fund schemes to invest in Indian market. The primary question is should you invest in a zero expense mutual funds if available in India. Investment decisions should be based on a number of factors, the most important being the investment goal, the investment duration, the risk appetite, and the historical performance of the fund. While the expense ratio is a criteria, it should not be the over-riding factor for an investment decision. The right way to invest in a mutual fund is first to pick the right fund, and then select the lower-fee direct investment option not the other way around Indian Mutual Funds have traditionally produced a significant amount of alpha over the benchmark. Thus, active investing is more prevalent in India as compared to markets like the US where passive investing is garnering a lion’s share of flows. Thus from an Indian context currently as things stand evaluating funds from a risk adjusted basis is a more useful barometer. Lastly, zero expense mutual fund schemes like those launched by the Fidelity follow their own in-house indices whereas Indian index funds and ETFs follow broader market indices. This makes existing Indian ETFs and index funds more transparent than Fidelity’s exchange funds. Also, the expense ratios of many Indian ETFs and direct plans of index funds are already as low as 0.05%, making them as good as zero cost funds. Security lending & borrowing: Earn extra income Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ Read the full article

[blogthetortoise-blog]

Can zero expense mutual fund schemes work in India?

Fidelity Investments has just launched a couple of new mutual fund schemes with zero expenses for retail investors in the US. These are the first ever zero expense ratio self-indexed funds for retail investors available in the market -Fidelity zero total market index fund (FZROX) and Fidelity zero international index fund (FZILX). In India, SEBI has been making efforts to make mutual fund investment a viable proposition trying to bring down the expense ratio and to increase the take-home returns of investors. With regards Index funds, coming up with zero expense mutual fund schemes can be a practical thing. But applying the same in case of actively managed funds would be challenging and might even be unsustainable in the long run. The revenue model for zero expense mutual funds is to earn stock lending fees (SLB) on the underlying holdings. The problem is, the stock loan market is practically non-existent in India, and so zero-fee mutual funds are a non-starter. That said there are already several index ETFs in India that have an expense ratio in the range of 5-10 bps which can be considered as an alternative to zero-fee mutual fund schemes to invest in Indian market. The primary question is should you invest in a zero expense mutual funds if available in India. Investment decisions should be based on a number of factors, the most important being the investment goal, the investment duration, the risk appetite, and the historical performance of the fund. While the expense ratio is a criteria, it should not be the over-riding factor for an investment decision. The right way to invest in a mutual fund is first to pick the right fund, and then select the lower-fee direct investment option not the other way around Indian Mutual Funds have traditionally produced a significant amount of alpha over the benchmark. Thus, active investing is more prevalent in India as compared to markets like the US where passive investing is garnering a lion’s share of flows. Thus from an Indian context currently as things stand evaluating funds from a risk adjusted basis is a more useful barometer. Lastly, zero expense mutual fund schemes like those launched by the Fidelity follow their own in-house indices whereas Indian index funds and ETFs follow broader market indices. This makes existing Indian ETFs and index funds more transparent than Fidelity’s exchange funds. Also, the expense ratios of many Indian ETFs and direct plans of index funds are already as low as 0.05%, making them as good as zero cost funds. Security lending & borrowing: Earn extra income Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ Read the full article

[blogthetortoise-blog]

Direct plan in mutual funds

Direct Plan in mutual funds were introduced on 1st January 2013 & since then within five years their share has grown to 40% of the industry’s total AUM. With consistent push from various stakeholders, direct plans contribute 14% of the total AUM held by individual investors. Product awareness campaigns by various market participants have consistently increased retail participation in direct funds. Mutual fund distributors/brokers and financial advisors help investors with the paperwork, fund selection and after-sales services. In lieu of that, they receive a commission from the mutual fund houses in the form of upfront and trail commissions. In reality the commissions are borne by the investors as the fund houses deduct them, in addition to other expenses, from the funds’ net assets. Thus the expense ratio of regular funds are always higher. With increased financial awareness empowering many to make their own investment decisions and technological advancements allow them to buy, sell and avail other services online there was a need to create a separate plan without commission. Thus SEBI directed mutual fund houses to create a separate plan which were termed as ‘direct plans’ as investors could buy them directly from the fund houses without the involvement of financial intermediaries or their expenses associated with them. Other than NAVs and expense ratios, other scheme characteristics such as fund management, investment objectives, asset allocation strategy, investment style and portfolio composition are the same as regular plans. Direct plans score over regular plans on higher returns. We look at aspects like expense ratios, NAVs and returns. They are all related to one another as a lower expense ratio leads to higher returns & NAV. Operating expenses include distributor’s commission along with administration, management, advertising expenses, etc. As fund houses do not incur distribution cost in direct plans, the  expenses of direct plans are lower than the regular plans, which translate into lower expense ratio. The expense ratio of direct plans is usually ~1% lower than that of corresponding regular plan. The lower expenses ratio of direct plans leads to higher returns as the savings made in distribution expenses remain invested and compound over a period of time. Although, the difference in returns may look trivial during the initial years, it becomes substantial over the long term. For example if expense ratio of direct plan is 1% lower than its regular plan, assuming that the SIP of its regular plan fund gives 15% annualized return over the next 25 years and its direct plan gives 16%, SIP investment of Rs.5000 in the regular and direct plans would grow to Rs.1.64 cr and Rs.1.99 cr respectively. Direct plans have higher NAVs than corresponding regular plan due to higher returns. As a fund’s operating expenses are deducted from its AUM, the lower operating expense of direct funds leads to higher NAVs. One can purchase direct plans from the mutual fund houses, either online or through their branch offices. Some independent financial advisors and online mutual fund marketplaces also offer direct plans but only in lieu of an advisory fee. This fee is directly paid by the investor and not routed through the fund houses. http://sipcalculator.in/ Steps to choose best performing mutual funds Balanced funds for monthly dividends- Temporarily Regular… Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ Read the full article

[blogthetortoise-blog]

Direct plan in mutual funds

Direct Plan in mutual funds were introduced on 1st January 2013 & since then within five years their share has grown to 40% of the industry’s total AUM. With consistent push from various stakeholders, direct plans contribute 14% of the total AUM held by individual investors. Product awareness campaigns by various market participants have consistently increased retail participation in direct funds. Mutual fund distributors/brokers and financial advisors help investors with the paperwork, fund selection and after-sales services. In lieu of that, they receive a commission from the mutual fund houses in the form of upfront and trail commissions. In reality the commissions are borne by the investors as the fund houses deduct them, in addition to other expenses, from the funds’ net assets. Thus the expense ratio of regular funds are always higher. With increased financial awareness empowering many to make their own investment decisions and technological advancements allow them to buy, sell and avail other services online there was a need to create a separate plan without commission. Thus SEBI directed mutual fund houses to create a separate plan which were termed as ‘direct plans’ as investors could buy them directly from the fund houses without the involvement of financial intermediaries or their expenses associated with them. Other than NAVs and expense ratios, other scheme characteristics such as fund management, investment objectives, asset allocation strategy, investment style and portfolio composition are the same as regular plans. Direct plans score over regular plans on higher returns. We look at aspects like expense ratios, NAVs and returns. They are all related to one another as a lower expense ratio leads to higher returns & NAV. Operating expenses include distributor’s commission along with administration, management, advertising expenses, etc. As fund houses do not incur distribution cost in direct plans, the  expenses of direct plans are lower than the regular plans, which translate into lower expense ratio. The expense ratio of direct plans is usually ~1% lower than that of corresponding regular plan. The lower expenses ratio of direct plans leads to higher returns as the savings made in distribution expenses remain invested and compound over a period of time. Although, the difference in returns may look trivial during the initial years, it becomes substantial over the long term. For example if expense ratio of direct plan is 1% lower than its regular plan, assuming that the SIP of its regular plan fund gives 15% annualized return over the next 25 years and its direct plan gives 16%, SIP investment of Rs.5000 in the regular and direct plans would grow to Rs.1.64 cr and Rs.1.99 cr respectively. Direct plans have higher NAVs than corresponding regular plan due to higher returns. As a fund’s operating expenses are deducted from its AUM, the lower operating expense of direct funds leads to higher NAVs. One can purchase direct plans from the mutual fund houses, either online or through their branch offices. Some independent financial advisors and online mutual fund marketplaces also offer direct plans but only in lieu of an advisory fee. This fee is directly paid by the investor and not routed through the fund houses. http://sipcalculator.in/ Steps to choose best performing mutual funds Balanced funds for monthly dividends- Temporarily Regular… Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ Read the full article

[simplemoneyman-blog]

From Target Date Funds To Lower Cost Index Funds

Also featured as a guest post on Mustard Seed Money:   Usually, on the first day of a new job, we receive some new hire paperwork from Human Resources. Included in that package is paperwork concerning which retirement plan we’d like to participate in, how much we’d like to contribute and how to get started. Sometimes we have to go online and complete this information.   The process of going through retirement paperwork can be overwhelming, to say the least. It’s because we are generally provided with a bunch of options or funds to choose from. In the end, we may just say I don’t feel like dealing with all this reading and will take the easy way out and pick a retirement fund option known as a target date fund. In recent years, more and more employers have started to offer this simple way for its employees to save for retirement.   Target date funds are mutual funds that generate an asset mix based on the anticipated date the participant is expected to retire. For example, if you are in your 20s and plan to retire in 2060, you would select a 2060 target date fund. This target date fund would be designed to be aggressive in its investment allocation. That is, it would have holdings in small-cap and growth companies and as the years go back would readjust the asset mix into more conservative assets such as bond funds and other cash equivalents. Thereby the fund “targets” the year of retirement based on its name and adjusts investments within the fund accordingly.    

History of Target Date Funds

  Target-date funds were created in 1994. This was in response to a lack of education by participants in 401(k) plans. Many participants were just not willing to conduct their own asset allocation and because of this nervousness and lack of desire on the part of the participants, the demand for target-date funds was born. They were first introduced by Wells Fargo and Barclays Global Investors.  Ofcourse in the late 90s and early 2000s, other investment companies joined the trend such as Fidelity, TRowe Price, and Vanguard with their own target date funds.   In order to facility so many participants into these retirement plans in an efficient way, groups or clusters of funds were created. These creations were distinguished by the average years' participants were expected to enter into retirement.   So for a 25-year old planning to retire at age 65, a 2060 target fund may be appropriate. For a 30-year old a 2055 fun and 35-year old a 2050 fund may be the right choice. You get the picture. The further away you are from retirement, the more aggressive the fund’s portfolio model will be (i.e., more in stocks and less in bonds). The closer you are to retirement, the more conservative and the fund allocation will adjust by itself without you having to go in and do anything. Sounds easy right? It sure is and that is why so many people decide to enroll in them.    

Target Funds Today

  Target-date funds continue to be super-popular these days in workplace retirement plans. They are easily accessible as they are offered by many employers. My previous two employers offered target-date funds and yes I was enrolled in them.   Even at my current employer, I initially selected a target date fund. It allowed me to be, well quite honestly lazy with my retirement planning. This along with the fact that target dates funds are the default funds offered in most defined contribution plans. Furthermore, many employers offer automatic enrollment as well as these funds and once people are in most don’t bother changing their investments because they know the target date fund will take care of it.   And even in my very first job which offered a 401k plan, most likely I selected a target date fund because I didn’t know much about the other funds. I probably read that this fund is for people that plan to retire in year 20XX. And so I took my calculator and did a quick difference between my age and 65 or 67 and said ok, that’s the one that’s right for me, ignoring everything else and moving on to the next piece of new hire paperwork.    

Target Date Funds Composition

  Target date funds have within them funds. So a target date fund is basically a fund of funds. It may have some money in a large-cap fund, some in a mid-cap fund, and some in a small-cap fund. It may have some money in an international fund, and some in a bond fund. Generally, the underlying funds in a target fund are from the same fund family.   So for example, if you are in a Fidelity target date fund or what Fidelity calls a Freedom Fund, the underlying funds are that of Fidelity as well and you as an investor have no control of those funds. Check out the allocation below of the Fidelity Freedom Index 2050 Fund:  

    Target Fund May Not Be My Target

  As we already know the closer someone is to retirement, the more a target fund’s objective changes to a more conservative investing approach. In sticking with the Fidelity Freedom Index 2050 Fund mentioned above, it has 26.94% in International Equity Funds. However, the Fidelity Freedom 2040 Fund has 31.13% in International Equity Funds.   If you are bullish in the international sector and are seeking more diversification and exposure there, but are comfortable with your domestic allocation, maybe you should develop your own mix of lower cost index funds and save in fees. This is what ended up doing and will discuss later.   Additionally, the set it and forget it nature of target funds is not one favored by many investment publications including Motley Fool who states that it’s important to continuously monitor the underlying fund performance to make sure it's meeting your expectations in terms of risk tolerance and returns. And up until a few months ago, I started thinking, are target date funds really worth it? Should I employ a set it and forget it approach for something as big as retirement? Well maybe, but maybe not.    

Target Date Fund Performance

  Apart from having less flexibility in allocating with target funds, another drawback is performance. The target date fund I previously had is a fund of funds. The underlying funds are actively managed. According to CNBC, many actively managed funds are being outperformed by passive funds and ETFs. And about 85% of active large-cap funds fail to meet their benchmarks.   The article further identifies Vanguard (the biggest provider of index products) which has received $216 billion in inflows. I’ve found that it really only makes sense to own an actively managed fund if you’re looking for a particular investment and in a specific sector as illustrated by Verdan Vuk, Senior Analyst for Money Forever. Otherwise, he says you’re just wasting money.    

Target Date Fund Fees

  If you’re putting money into a retirement plan, you’re doing better than two-thirds of Americans because who are otherwise not. So you’re already ahead of the game anyway. But there may be a way to do better and that is by avoiding excessive fees.  One of the main reasons why investors avoid target date fund is very simple: high fees. Everywhere I read this is a common theme as some fund companies can “charge twice or even three times” the amount in fees as their competitors.   The fund I was in (TRRMX or T. Rowe Price Retirement 2050 Fund) has an expense ratio of 0.76%.  So I decided to take action by logging into my account and creating my own allocation. My retirement website offers an interactive tool where I can enter data such as my age, when I plan to retire, how much I plan to spend in retirement, and what I’ve saved thus far. The output results in the creation of a customized allocation.  This is the allocation model that was suggested for the variables I provided:  

  Using this model, I proceeded to allocate my current fund and al future contributions from the target date fund into lower-cost index funds. This movement of investments is offered for free by my retirement provider and maybe by yours as well! Below is my new self-created portfolio model:     Investments & Allocation Expense Ratio Asset Class Vanguard Total International Stock Index Fund - Institutional Shares - 25% 0.090% Int'l Vanguard(R) Small-Cap Index Fund - Institutional Shares - 5% 0.050% Small-Cap Vanguard(R) Mid-Cap Index Fund - Institutional Plus Shares - 10% 0.010% Mid-Cap Vanguard(R) Institutional Index Fund - Institutional Plus Shares - 50% 0.020% Large-Cap Vanguard(R) Total Bond Market Index Fund - Institutional Shares  - 7% 0.040% Bonds *Investment Contract Pool - 3% * Total Expense Ratio 0.210% Target Fund 0.760% Difference 0.550%     And with this change, I’ll be saving over half a percent in annual fees, as highlighted above! Trust me, over-time that can add up to a lot in fees. I did the math really quickly and when the balance gets higher the expense ratio really starts making a difference:     When 401k Balance Is: Ratio Difference Annual Savings  $          100,000 0.550%  $            550  $          500,000 0.550%  $         2,750  $       1,000,000 0.550%  $         5,500  $       1,500,000 0.550%  $         8,250     So I went online a googled some more, for an expense ratio calculator. I found a simple one on Begin to Invest. Based on the below calculation, if someone were to have $200,000 as a starting point and decided to move investments, contribute the maximum as it stands right now, earn 6%, then they’d save over $280,000 over 30 years when employing a low-cost index fund VA a target date fund:  

    I encourage everyone to use this site and plug in some hypotheticals to see what savings are available.    

Take Charge or Your Investments

  Retirement is a major part of our lives. And as such, planning for it should be as well. We owe it to ourselves to learn more about low-cost index funds because they cost less than target funds and have performed better historically. Why pay more and get less?     So readers are you in a target retirement fund? If so, have you thought about moving to lower cost index-funds?   ______________________________________________________________________________

  I use  because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!   Read the full article