Deciphering SENSEX and NIFTY!

While there are several indexes which represent the stock market in India, Sensex and Nifty are the salient indexes which represent Indian stock market and these indexes are tracked at a global level to see how Indian stock markets are doing, similar to how we track  Dow Jones and Nasdaq indexes of US stock market.

For a stock market investor, it is always interesting to see how Sensex and Nifty moves impacts individual portfolios? To understand this, first we need to understand what are the stocks that comprise Sensex and Nifty Continue reading

Why every mutual fund investor should care about expense Ratio?

expense-Img1Expense Ratio includes fund management fees, marketing or selling expenses, transaction costs, Investor communication costs, custodian fees and register fees. Expenses Ratio is calculated as a percentage of the fund’s average Net Asset Value(NAV). The daily NAV that is published is after deducting the expense ratio.

For an actively Managed fund, SEBI imposed certain limits on expense ratio(Below table has the summary for equity funds). For debt funds, the expense ratio allowed is 0.25 percent points lower than equity funds. Service tax on fund management charges is also passed on to the investors, which adds to the expense Ratio.

Corpus(AUM)Cost as % of AUM
First ₹100 Cr2.5%
Next ₹300 Cr2,25%
Next ₹300 Cr2 %
Balance Corpus1.75%

Why is it important?

For Most of the mutual funds expense ratio is between 2 and 3%, which may not be high if the funds are delivering 25 to 30 percent returns, but when the funds return comes down to single digit or low double-digit, this expense ratio will hurt as it becomes a quarter of your return :( , if you consider compounding over long-term, this can have a cascading effect.

In the above chart, you can see what a difference of 1% can make over a period of 20 or 30 years. If you invest in two funds with a monthly SIP of 10K each, with 1.5% and 2.5% expense ratio, assuming both funds return give around 15% CAGR, you end up with  1.25Cr more in the fund with 1% less expense Ratio, which is not a paltry sum even considering Inflation over 30 year period :-)

Should it be the only criteria in choosing a mutual fund?

No. A fund with excellent track record charging 2.5% might be better than the fund with average track record charging 1.5%, choosing the later over earlier one might save some money, but if you consider Compounding benefits and the long-term opportunity cost, earlier choice might work better.

Is there an alternative?

Global investors are migrating to index funds, which are not actively managed, but comprises of mainly index stocks and expense ratios are significantly less, compared to actively manged mutual funds, this might happen in India too over a time period.

Expense Ratio is in addition to the exit load charged by mutual funds(only if you exit before certain period of time, 12 to 24 months), entry loads are banned by SEBI.

Happy investing!

Top 10 mistakes of investors in stock market?

Common trite of both a novice investor and veteran investor are the mistakes they make independent of history of learning’s.

mistake.11k1.Being patient with losers and impatient with winners:Investors hold onto losing stocks too long in hopes they will come back to their original price while selling their winners too early. Several of these winners which are sold out early might be multibaggers down the line.

2.Fear and greed: Selling on fear and Buying on greed. As the legendary investor once said, it should be the other way around ‘Buy when every body else is selling and sell when every body else is buying’. It is a human psychology to react in this manner, but if you want to prevail in the crowd as smart investor, in these testing times ‘patience’ is more important attribute to have during the turbulent times.

3.Falling in love with stock: After doing lot of research you pick a stock, but over a period several things change, with new competition, they might be loosing market share, earning growth is decelerating, debt might be piling up, Continue reading

GDP – what is it?

Gross Domestic Product(GDP) is the best way to measure a country’s economy, it includes every thing produced by all the people and the companies in the country.

download (1)Primary components of GDP are
1.Personal consumption/expenditure
2.Business Investment
3.Government spending
4.Exports-Imports

Economists use GDP to determine the size of economy at a point of time and growth of economy over a period of time. GDP measures the ‘Total market value of all ‘final’ goods and services produced in an economy in a given year’.
‘Final’ in the above definition is critical, if you consider tires given to a car manufacturer they are not considered as the final goods because in this case Car is the final goods, tire value is considered along with the value of the car. But if the same tire is used in replacement market, it is final goods hence it is considered in calculating real value of GDP.

GDP per capita: GDP per capita is a measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another because it shows the relative performance of the countries

what does increase in GDP(year on year) mean to any country? It can be any of the following.
1.Country produced more goods and services than previous years.
2.Same amount of goods and services were produced, but the prices of goods and services increased
3.combination of 1 and 2

To distinguish between 1 and 2, we need to consider the difference between Real and Nominal GDP.

Nominal vs Real GDP?
Nominal GDP is not adjusted for Inflation, while real GDP is adjusted to Inflation. Economy growth is measured by real GDP over time.
General rule of thumb is two consecutive quarters of decline in real GDP constitutes as Recession.

While GDP represents state of economy,  standard of living of the people in the country is represented by GDP per Capita. GDP per capita is gross domestic product divided by midyear population of the country. 

The Gross Domestic Product (GDP) in India was worth 2066.90 billion US dollars in 2014. The Gross Domestic Product per capita in India was last recorded at 1262.64 US dollars in 2014.

The Gross Domestic Product (GDP) in India expanded 7.50 percent in the first quarter of 2015 over the same quarter of the previous year. GDP Annual Growth Rate in India averaged percent from 1951 until 2015, reaching an all time high of 11.40 percent in the first quarter of 2010 and a record low of -5.20 percent in the fourth quarter of 1979.

Why should you care about Inflation?

inf3It’s a useful paradox: By learning more about how money affects our lives, we can make sure it doesn’t take over our lives, and by learning how to look after our financial capital, we can also take better care of our human capital. Inflation is the evil that we cannot control, but we need to consider it in our financial planning either it is for our retirement or for children’s education. Continue reading