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HDFC MF launched its brand new HDFC Housing Opportunities Fund last week. The opportunities fund only represents the opportunity for the fund house, not for you. Here are the reasons you should stay away from this NFO.

Now, it wasn’t long ago that SEBI issued guidelines about rationalising the number and types of schemes that mutual fund houses have loaded themselves with confusing the retail investor to no end.

Some loopholes (such as closed ended funds excluded from the purview) still existed but I thought that things would change for the better. I was so wrong!

The first attempts to kill the spirit of these guidelines are already happening. The loophole that is being exploited is the closed ended funds to which the guidelines don’t apply.

Can you beat that?

Which fund houses are doing it?

Not difficult to guess. Rattle out all the popular names – HDFC, Aditya Birla and ICICI. They are experts at this manipulation and they prove it once again.

Anyways, here I am talking about the fund from HDFC Housing Opportunities Fund – Series 1

So, I wasn’t too sure about covering the new HDFC Housing Opportunities Fund until I received a message from an investor asking how can he subscribe.

What on earth inspires the need for a new thematic fund?

If you are to believe what HDFC MF says, it is the wave of “Housing for all” and the push by the government that will propel this theme.

By the way, they don’t plan to invest in only “housing” companies but all the allied sectors and companies – retail, banking, cement, electricity, etc. etc.

The sector break up of the funds investments could look something like this.

Guess what?

This is the actual break up of top 10 sectors of none other than the HDFC Infrastructure Fund – another thematic fund from HDFC MF but focused on the infra theme. Just to rejig your memory – this infra fund was launched in Feb 2008.

The difference with the new HDFC Housing Opportunities Fund is that it is a closed ended fund. That is where the loophole was exploited. If you subscribe now, you can forget your money for 1140 days, that is a little more than 3 years.

The choice of the index of the fund is pretty lame. It is India Housing and Allied Businesses Index created and maintained by IISL, known for the Nifty series of indices. You can read about it on this link on HDFC MF’s site. The Nifty 500 was a better choice for a diversified portfolio like this.

So, why HDFC Housing Opportunities Fund or series of funds?

Let’s invert and seek an answer from a different point of view – HDFC MF’s.

I guess the thinking in HDFC MF went something like this.

  • The theme is a killer idea. Everyone wants to buy a house and if we tell an investor that the fund intends to make money from that idea itself, few will say no.
  • The lure of the low Rs. 10 NAV of an NFO is difficult to beat specially to new investors in smaller towns.
  • The market is approaching tight valuations, there is enough new interest in the market and it is the right time to lock in fresh investment money from retail investors.
  • (And the big one.) We have to merge several similar schemes, might as well launch a new fund that does not get covered by the SEBI guidelines and move the money from other funds there. Voila! Kill two birds with one stone!

You see HDFC MF is looking at it purely from business reasons and retail investors are falling for it for all the wrong ones.

The opportunities fund only represents the opportunity for the fund house, not for you.

You have great funds available with an existing track record that you can give your money to. A good business will be invested by any investor / fund. We don’t need a new fund to do that for us.

Stay away from HDFC Housing Opportunities Fund – NFO. 

What’s your take? Are you investing or not? Do share with me here.

The post HDFC Housing Opportunities Fund – The manipulation begins appeared first on Vipin Khandelwal.

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Behavioural Alpha

Someone on Twitter mentioned that index funds create alpha. I don’t know how is that possible but what is certainly possible is that you can create investment alpha with your own behaviour.

It is a known fact that the returns of an investment instruments (say mutual fund) and the actual return of an investor vary significantly.

Why is that?

Find out in this note on behavioural alpha.

Investment Journey of Rs. 10000 with various debt funds

Quora is an interesting place and sometimes the questions asked there are too. I was asked to answer one such about a choice of debt funds. The question was about a choice between a GILT fund and a Dynamic Bond Fund with an investment period of 3 to 5 years.

I liked the question and answered it. Then I thought “why not share with you the findings with you as well, with more examples.”

And so this note happened. It will take you through the journey of investment with various debt funds and also refresh your understanding of this investment.

Read the entire piece now and tell me which journey will you prefer.   

The best way to create a non profit organisation

The new iPhone is here and several people continue to believe that owning an iPhone is what is going to make them truly happy.

I believe giving, not owning, is what makes us truly happy.

It is quite likely that you contribute monetarily to a social cause, a charity and or may be volunteer with one. It gives us a huge sense of fulfilment too.

Now it is quietly likely that you have a cause in mind, a unique initiative, that you want to work for. And you may be considering creating an institution around the same so as to bring together a larger community pushing forward the common mission.

I have one in mind and I want to create an institution too. The first thought that comes to mind is to create a Trust. Well, I recently came to know through my friend, that Trust is the only mechanism. There are other possibilities too.

Heard of a Section 8 Company?


Know here about all the possibilities of creating a non profit organisation that you have in mind.  

As always keep sharing your thoughts and feedback.

Wish you a good weekend.

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You should stay invested for the long term” is the most common statement you hear as an investor.

But I doubt anyone really understands what is long term actually, specially with regards to equity investments.

Is it 1 year? When the long term capital gains tax becomes zero.

Is it 3 years? Because your tax saving mutual fund locks you in for this period.

Or is it 5 years? Which is the minimum premium paying term for most ULIPs and they can be surrendered without any cost.

There is no clear answer yet. It appears that actually no one has any idea about long term and long term investing.

Over the last few weeks, two charts caught my attention.

One published by Association of Mutual Funds in India, the Mutual Fund industry lobby group, as a part of its monthly update on the industry. This is what it says.

As you notice, only 37% of the investments stay for more than 2 years. In other words, 73% 63% of equity investments are sold before completing 2 years.  

In a market where most investors still enter with the thought of ‘day trading’ in stocks, this looks like a substantially positive indicator.

But when you see it in comparative context it tells a different story. In 2015, a similar report based on data by AMFI stated that equity investments that stayed for over 2 years was 50%. 

This means as investors we don’t care about long term. Basically, more investors are saying good bye to long term investing.

The other is from a news piece from LiveMint, the business newspaper, about persistency ratios of Top 4 life insurance companies. Persistency means the policy is still active and the buyer is paying a premium.

This is how the persistency ratio sizes up.

In this case, we are referring to the investment based insurance products such as endowment, money back and ULIPs.

Typically an insurance policy is taken for 15 to 20 year period.

As you can see post the 3rd year, not many people are interested in staying with the investment, which they bought for the long term. Post the 5th year, the number worsens. In Financial Year 2016, only 36% stayed put with their insurance investments.

So much for long term investing.

Long term investing! Really?

With insurance it is pretty clear that the sales is messy with banks working overtime to complete targets of transferring money from investor’s pocket to the insurance company and their own via the “premium” trick.

As policy holders realise the issue and the trick played out on them, they are quick to head to the exit.

As an investor the only thing you can do to save yourself is to ignore your banker’s investment advice.

What is the mutual fund investor doing? He looks at star ratings and rankings to first make an investment and then dumping it for another. The rating is an easy, understandable and no nonsense indicator. Plus it focuses on the most important thing for the investor – returns. Nothing else matters.

The investor sells the fund which is not performing currently (hence low rating or ranking) to buy a mutual fund which is performing (hence high star rating or ranking).

The problem is that ratings and rankings change every quarter.

To which the investor says, “See, this became a 4 star fund and then a 3 star fund but I waited for 3 quarters. I waited for 1 year before making the change. Am I not patient?”

I have no answer. All that I can say is “Good luck!”

The post Is long term investing dying? 63% investments sold in less than 2 years appeared first on Vipin Khandelwal.

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Welcome to the second Funny Mutual Fund Show.

Bappa wished us goodbye yesterday and today Funnybone is back up and she is doling out humour and wisdom for all of us mortal investors.

Go ahead and give yourself some respite from the stress of your investments.

(Imagine some opening music for effect)

Me: Funnybone, I think, you didn’t answer my question from last time.

Funnybone: You don’t have any work except asking these stupid questions.

Anyways, which one?

Me: (little hurt!) What is Edelweiss MF’s speciality?

Funnybone: Ah! you so hell bent on this one. (pause)

So far, Edelweiss did have a speciality. Now it has lost it.

Me: Oh really! What?

Funnybone: Close to 100% of AUM at Edelweiss was in just 2 arbitrage schemes. Calling itself an arbitrage fund would have served it better.

In fact, calling it a mutual fund would have been an insult to it. (winks at me!)

Ah! but now it has lost the claim.

Me: (surprised!) But how?

Funnybone: (with a frustrated look) You are good for nothing.

It merged an entire fund house (JP Morgan) into itself. So, Edelweiss is now like just any other fund house.


Me: Oh! But you know it also announced something brave. Following DSP Blackrock’s announcement, it will now use Total Return Index (TRI) benchmark for performance comparison of its funds.

By the way, what’s this sudden rush to Total Return Index (TRI benchmark)?

Funnybone: What do you expect the ‘run out of ideas marketing managers’ to do. There is nothing unique in the funds they have.

This is the new way to get investors attention and get the AUM gravy train to keep moving.

Me: Hey! But isn’t it a good thing? Investors will get to see a true picture of performance and see if fund manager is actually doing the job.

Funnybone: (almost scolding) Who made you an advisor?

Investors don’t look at even the current benchmark returns, what will they do with the TRI? They are happy entering when the fund is doing well and hopping from one to the other with the same criteria.

Now, I am afraid when you talk Total Returns to the investor, she is going to think that she will get something extra.

Worse, she could think she was not getting the TOTAL thing before and has been shortchanged all this long.

(pointing a finger at me) Be ready for trouble!

(my head spins) 

Me: You have gone crazy funnybone. Investors are much smarter now.

Funnybone: Yeah right!

That’s why the smart investor buys New Fund Offers.

And also doesn’t hesitate to have 30 different mutual fund schemes in the portfolio.

Me: Hmmm…  You see change is happening. There is news that SEBI is going to push AMCs to reduce the number of schemes, merge similar schemes, thus help the investor make better choices.

Funnybone: What! Are you reading a newspaper from 2010?  (laughs madly)

Funnybone can’t stop laughing!

So we will have to end this show now!

We will be back soon.

Till then take care.

(Imagine some closing music for effect)

Link to the previous Funny Mutual Fund Show

The humour is in good spirit. No offence!

Do share your feedback and suggestions with me about the funny mutual fund show.

The post The Funny Mutual Fund Show – Sept 2017 appeared first on Vipin Khandelwal.

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It is a known fact that past performance continues to be the single biggest criteria for investors to choose funds for their portfolio. Performance is difficult to ignore.

Well, let’s make an effort to go beyond performance and dive a little deeper with a few funds.

3 funds that probably appear in your portfolio are:

  1. DSP Blackrock Micro Cap Fund
  2. ICICI Pru Value Discovery Fund
  3. Franklin India High Growth Companies Fund

As I said, as an investor, you are not interested in the history or other facts about the fund. As long as it performs, it is great.

Over the last few years, the above 3 funds have been favourites of the investor. This is proved by the huge amount of investment money that they have managed to attract.

However, there is more to a fund than meets the eye (the performance). Let’s dig into the real stories.

#1 DSP Blackrock Micro Cap Fund

As the name suggests has been recently in the news for NOT accepting any more investments. The bull run has got a lot of small stocks to top their valuation and any further money invested in such stocks will not result in adequate risk adjusted returns. There is quite a chance that money invested now can lose capital too, partially or fully.

It is quite a unique fund with a focused investment objective. But that’s not all.

Click here to read a complete note and other facts on this fund on Unovest.

#2 ICICI Prudential Value Discovery Fund

This is a fund I have mentioned several times in my earlier posts. Very few investors are aware about its history. Even the popular media conveniently ignores what it stood for and how it has changed over the years.

The biggest learning that you need to have is you need to tone down your expectations with this fund. It will happen only when you know the whole story.

Click here to read a complete note on ICICI Pru Value Discovery on Unovest.

#3 Franklin India High Growth Companies Fund

This is yet another common fund in an investor’s portfolio. Though it has found its place only the last few years. The

High Growth fund is a flexicap/multicap fund from the Franklin Templeton stable.  How is it different from the other 2 multicap funds from FT – Franklin India Flexi cap and Franklin India Prima Plus.

Is it likely to sustain the enormous performance it had in 2014-15? Yes, no, maybe!

Click here to read the complete note on Franklin India High Growth Companies Fund on Unovest.

By the way, it is one of the few funds that while being open ended also has an exit load of 1% if you redeem before 2 years of purchase.

Between you and me: Do leave your comments. What new did you come to know?

Are there any other funds you would want me to cover?

The post 3 funds, 3 stories – Here’s what you don’t know appeared first on Vipin Khandelwal.

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What are large cap funds?

Large cap funds typically invest in large sized companies, the bluechips, so to say. Typically, these companies form a part of the Sensex 30 index or the Nifty 50 index.

Within mutual funds, you get two types of fund management – active and passive.

When you choose an active fund, a fund manager along with his/her research team decides which stocks to invest in and how much. The portfolio design and management is ‘active‘ based on their assumptions, understanding of business and the funds available.

Passive funds are by nature passive. All they do is select an index and invest exactly as per the index. For example, if there are 30 stocks in the Sensex, each with a unique weightage, the passive fund will mimic this as it is. As you would guess, there is no need of a fund manager or research team in case of a passive fund – thus saving some money on expenses. Passive funds are also called Index Funds.

For more details on active vs passive, you can look at this primer

Coming back to large cap funds, when you choose an active large cap fund, you believe that the fund manager talk that s/he can constructing a better portfolio than the index itself and hence generate a higher return for you. For this effort, s/he charges you an additional expense too.

For a long time, fund managers of large cap funds could indeed generate a better return with their skill and beat the index returns by a significant margin.

However, this argument is coming apart now.

Look at the image below for a peer comparison of large cap funds along with Sensex and the category.

Source: Unovest. Data for regular plans of the above mutual funds. Do add about 1.5% to 2% of dividends to the S&P BSE Sensex to arrive at its Total Return and make a fair comparison.

As you will notice, the performance of the large cap funds is constantly falling behind their index. In other words, it is becoming difficult for the actively managed funds to beat the index.

One simple reason is that the nature of market is changing and there is lot more investor interest. 

If you look at the facts, there is more investor money coming into the markets, specially via the equity portion of National Pension Scheme and the Employees Provident Fund. This investment runs into thousands of crores every year. Take for instance EPFO, which is planning to invest Rs. 22,500 crores in this financial year 2017-18 (source).

Both the organisations go with index funds – ETF or Exchange Traded Funds based on Nifty 50 and Sensex 30 index – which invest in bluechips of the bluechips.

Interestingly, while the constant money supply ensures that the large cap stocks keep growing, it leaves little scope for the actively managed large cap fund to have ‘special insights‘ to outperform. Even if they have, the liquidity driven stocks will leave them no space to benefit from that insight.

See the image below for a peer comparison of index funds along with Nifty 50 and the category.

Source: Unovest. Only regular plans considered.

As you can see, the index funds move closely with the index.

For now, I can say that that investors who want to take exposure to pure bluechip stocks can simply avoid the active funds and go for the index variants. At least, you save the extra costs and still  generate similar or more returns. 

But the fund managers are not going to leave you so soon. They are very smart.

You see this smartness at work when they pitch to you not a large cap fund but a “predominantly large cap” fund, with large cap as not the only focus.

Aditya Birla SunLife Frontline Equity Fund, a popular predominantly large cap fund, says this for itself:

A diversified equity fund that invests across sectors in line with S&P BSE 200 Index, with a bias for large caps but not exclusively focused on them.

Even its portfolio allocation confirms this statement. And by doing this, it now pushes itself into another category – multi cap.

See this image below for peer comparison along with benchmark and category for the fund.

Source: Unovest. Don’t forget to add 1.5% to 2% for dividend to the index return to make a fair comparison.

Several other large cap funds do the same thing.

As this phenomena grows, you will witness large cap funds turning themselves moving beyond large cap category. That is the only way they will be able to generate ‘alpha’ or the elusive additional return to be able to justify their fund management expenses.

Similarly, there are other variants such as the “Large Cap Advantage”. Even with index funds, you can see “sensex plus” or “nifty plus”.

There is deliberate anxiety of choice kept for you.

My two words of advice – Watch out!

The post Large cap funds – Should you choose active funds or index? appeared first on Vipin Khandelwal.

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While the mutual fund industry has reached Rs. 20 lakh crores in assets size and is expected to reach to Rs. 95 lakh crores by 2025 (as per Birla SL MF’s CEO), what does an investor expect?

You and I may have many expectations but one common thing is that we expect them to deliver more for us.

To illustrate with an example, Rs 1 lakh invested today earning an expected returns of 10% year or year, will result in Rs. 6.73 lakhs in 20 years.

Now, if this 10% could become 10.5%, the value at the end of 20 years will be Rs. 7.37 lakhs.

This is 9.5% higher than the value at 10% and, hold your breath, it is 64% of Rs. 1 lakh, your original investment amount.

One of the undisputed ways to add this 0.5% (or any number for that matter) is to bring down the expense ratio and put more money in the hands of the investor.

This is entirely possible, since with rising asset size, the economies of scale get working. The fund house gets a wider asset base to spread most of its fixed expenses. This benefits the investor by providing higher returns as also the fund house, which can still generate a decent profit.

Vanguard Mutual, the largest no load MF in the world, does the same with its passive funds.

A rupee saved is rupee earned, right?

Unfortunately, this is not the reality here in India, at least not completely.

Let me share some findings from numbers that I recently ran through.  

I downloaded expense ratio of 1211 mutual fund schemes from April 2016 to June 2017, all direct plans. I measured the change in expense ratios from May 2016 to May 2017 and June 2016 to June 2017.

Why only direct plans? They are less confusing since they consist of fund management and other administration charges only. The regular plan expense, in contrast, has varying commission levels included, making it difficult to analyse.

More so, we are only concerned with the expenses that the fund house can control and can reduce as it increases its asset size.


Of the 1211 schemes, 588 schemes, that is about 36%, lowered their expense ratio from June ’16 to June ’17. Good!

However, in the same period, about 621 schemes or 38.5%, increased their expense ratio. Whoa!

Now, this increase can be as much as 0.01% to 1000%. The small increases may not be so relevant, so we will filter it down further.

Even if we were to remove insignificant increase and only consider, let’s say more than 10%, still about 200 schemes, that is 12% of all, make it to the list. Not a small number!

What is more surprising that this is not limited to just equity funds. More debt funds – where the returns are muted in any case – have seen an increase in expense ratio.

Heard of double whammy!

Let’s go dive into the fund schemes and the change in expense ratio numbers.

Please note that all the % numbers mentioned below are change during that time period. It is not the actual expense ratio but the CHANGE in expense ratio.

Here’s a couple from Birla SL Mutual Fund.

Birla’s MIPs which had a sort of a dream run, kept varying their expense ratio in the range of 0.6 to 1.28 in various periods last year. Not sure, what can make expense ratios play such a yo-yo, considering this is only a direct plan. Currently, the expense ratio is on the higher side of the observed range.

Let’s move to HDFC Mutual Fund. As it appears, HDFC MF used the debt funds to the hilt to add to its bottomline. The expense ratio of the debt funds has increased substantially.

In the HDFC Floating Rate Income Fund – Long Term Plan, the expenses are up 110% from June 2016 to June 2017.

In HDFC Gilt – Short Term plan, it is up 87.5%, Banking & PSU Debt Fund 73.3%,  and in HDFC Medium Term Opportunities, it is up 44.4%.

Other debt funds too have undergone increase. See this table below.

In case of Franklin India MF, some of its debt and equity funds saw substantial jump in expense ratio.  Franklin MF’s Cash Management Account has witnessed a 73% increase in its expense ratio (June to June). Its Income Opportunities Fund too jacked up expenses by 80.4%.

The Franklin India High Growth Cos Fund has been a darling of investors for some time. No doubt the fund has used the increased AUM along with the higher expense ratio to jack up its own bottomline too.

The international feeder fund – Franklin European Growth Fund too saw quite an increase. In fact, most international funds in the Indian Fund industry saw increase in expense ratio. See one further with ICICI MF – US Bluechip Equity fund.

Now, look at some of the funds from ICICI Prudential. The Business cycle fund seems to be turning quite in favour of the fund house – expense ratio more than doubled over the year.

Its ICICI Exports and Other Services Fund too has been a favourite with returns chasing investors. No doubt the fund house has used the funds expense ratio to fuel its own bottomline.

The surprising entry is that of the Nifty Next 50 index fund. It’s expense ratio was 0.55% in March 2016 to 0.29% in April 2016 and back to 0.42% now.

An index fund is assumed to have a low expense ratio and expected to go lower. This is quite the opposite. What is also interesting to note is that the fund house decreased the ratio in the first 3 months of the last financial year, only to increase it again.

The debt funds too haven’t been spared.

Some of ICICI MF’s FMPs and Capital protection funds (not mentioned here) have seen doubling of their expense ratios.

You have to note this commentary in the background that ICICI has now gone to become the largest fund house in the country by asset size.

IDFC MF too hasn’t left itself behind in taking a dip in the market led returns.

IDFC MF has increased expenses across Debt and Equity. While IDFC Equity fund now charges 81.3% more than an year ago, IDFC Ultra Short Term about 69% more and IDFC Money Manager about 61% more.

Kotak MF’s all debt funds surprisingly have gone for the kill. Is there too much competition on the equity side?

SBI MF’s increase in expense ratio is nothing of an alarm as such but goes against expectations.

Note that SBI Small & Midcap Fund stopped taking subscriptions or new investments long back. You can only redeem not add.

Tata MF’s more popular funds too have seen an increase in expense ratio.

Finally, UTI MF’s debt funds see an increase.

Frankly, the expense ratio looks like an ugly puzzle.

Expense ratios seem to work more at the whims and fancies of the fund houses. They decrease at one point and increase at another.

The larger the fund house, more extraction it does from its asset size. For example, HDFC and ICICI.

Debt funds haven’t been spared too. The bane of lower returns is further hurt by a higher expense ratio. See the table below of liquid fund and the change in expense ratios: 

Now, if you look at a standalone expense ratio of a liquid fund, nothing seems alarming. For example, Mirae Cash Management fund’s expense ratio in May 2016 was reported as 0.02%, which more than doubled to 0.05% in May 2017. It is currently at 0.04%.

As an absolute number, it doesn’t hurt at all. Look at the relative change and you know what’s going on.

Make hay while the sun shines

In the final assessment, what appears is that most fund houses don’t operate on the principle of “share more with the investors“. They clearly want their pound of the flesh.

Specially, when the mutual fund investments are enjoying higher than normal returns pushed by a bull market 9for equity) and falling interest rates and thus higher returns (for debt funds).

What will happen when the tide turns? It remains to be seen.

Between you and me: How much attention do you pay to the expense ratio? Which fund house in your assessment is fair to its investors and shares more as and when possible. Which one is the Vanguard of India, if any?

The post MF Expense Ratio – Give me my pound of flesh! appeared first on Vipin Khandelwal.

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Selecting mutual funds from thousands of schemes and options is a tough job. If an investor were to left all to herself to pick one of them, it would be a journey through hell.

However, several individuals and organisations work to make the process easy for the investor.

One of the solutions offered for this purpose is the star ratings and rankings.

Companies like ValueResearch and Morningstar provide ratings, while CRISIL does rankings. (For those who are not aware, CRISIL is primarily a credit rating company and provides several information products to the financial services industry.)

If you use sites such as Moneycontrol, you will notice the CRISIL MF ranking mentioned for the funds.

Similarly, many media publications and fund houses or distributors and advisors use one or more of these as a part of their investor communication.

Investors too consider these ratings and rankings as ‘investing signals’.

Now, I have written in the past that relying on only the star ratings and rankings is not right for your mutual fund investments.

Please note that the ratings and rankings are only filters, a shortlist to enable you to identify and dig further.

Having said that, let’s go a little deeper and understand the CRISIL MF ranking.

Decoding CRISIL Fund ranking

Unlike the star ratings method, which use only returns or risk adjusted returns, CRISIL’s ranking method goes beyond.

Have a look at the image below. This is a list of all the parameters and weightage used by CRISIL for its fund rankings.

Source; CROP stands for Credit Opportunities Fund.

CRISIL also uses portfolio parameters such as industry or sector concentration as well as top holdings concentration along with liquidity to determine the rank for the funds it uses.

In case of debt funds, asset quality (overall credit rating of the investments) as well as modified duration (price sensitivity of the portfolio to change in interest rates) also is taken into account.

For pure equity funds, past returns, as is, are used.

In case of hybrid funds (mix of equity and debt), the performance is driven by both the assets and hence, it calculates a superior return score (SRS), based on its own methodology.

Coming to the weightage, past performance is the BHEEM of the group. It gets a high weightage (more than half). The other parameters get an allocation from the rest.

The point clearly made here is that if you have not performed, you are not good.

Eligibility Criteria

Let’s now see the criteria that determine if a particular fund or category will be ranked or not.

CRISIL uses some of the common filters here. Some of the most relevant ones are:

  1. Only open ended funds are considered.
  2. The fund needs to have a minimum NAV history of 3 years for equity, hybrid and long term debt schemes such as gilt funds; 1 year NAV history for all other debt funds.
  3. Schemes which have an Average Quarterly AUM of 98 percentile of the category only will be considered. Schemes that are too small in size are filtered out.
  4. The scheme should have made portfolio disclosure for all the last 3 months of the quarter. So, even if it is a large, old scheme, it could disqualify on this criteria alone.
  5. There have to minimum 5 schemes in the category for it to be considered for ranking.

So, CRISIL applies the eligibility criteria to shortlist the fund schemes and then further the parameters and weight on these schemes to arrive at its final rankings.

A CRISIL fund ranking table for Large cap oriented equity funds looks like this:


Note: A rank works quite opposite to a star rating. A star rating of 5 is very good, but no fund wants a rank 5. A rank 1 and a 5 star rating are equivalent. 

Talk about confusing!

So CRISIL does the ranking for the following categories:

So far so good.

Now, I have 2 issues with CRISIL fund ranking. 

#1 Incorrect categorisation

HDFC Equity Fund and UTI Bluechip Flexicap are categorised as large cap when in fact, they are multicaps or flexicaps. The fund documents say so.

Quantum Long Term Equity Fund is categorised as Diversified Equity while actually it is predominantly large cap.

HDFC Midcap opportunities is categories as mid cap when in fact its size rivals many large cap or flexi cap funds. It is ideally a flexicap. (Here is my another note on HDFC Midcap)

While CRISIL has its own definition to categorise fund, it doesn’t seem quite right.

Just because a multicap fund has bigger exposure to large cap stocks (>75%) does not mean it can be called a large cap fund. In fact a big sized multi cap fund is likely to have a higher exposure to large cap stocks.

Similarly, its mid and small cap definition is something we can’t come to terms with. It says if the fund has <45% exposure to large caps. That’s quite high for a midcap/small cap fund.

The incorrect categorisation can lead to comparison of apples with oranges. 

CRISIL can and should pay more attention to this aspect to fine tune the categorisation. In my view, most categories are clearly indicated by the fund houses themselves in the respective scheme related documents.

Looking at the fund benchmark is also a good way to understand the fund category. If a fund such as HDFC Equity, has Nifty 500 as the benchmark, then it cannot be anything but a multicap fund.

#2 Skewed weightage to performance

The biggest issue for me is that for equity funds, in 90% of the cases, the final rank is equal to the the performance rank of the fund.

Of course, this is because the performance (mean return) gets 55% of the weightage. In case of balanced (hybrid) funds, the returns have a 75% weightage. Gosh!

To my mind, this is incorrect. The best way to resolve this issue is to give equal weightage to returns and volatility.

Interestingly, CRISIL does it for its debt funds. See the parameter and weightage table again. Mean returns for debt funds (except Gilt and Income funds) have a 50% weightage.

And it clearly reflects in the debt fund rankings too. Most composite or final ranks for debt funds are different from their performance ranks.

CRISIL should make this one consistent for all categories – a 50% weightage to returns. (Personally, I would give it much less weight.)

CRISIL Fund Ranking – Take it with a pinch of salt!

As cautioned before too, CRISIL fund ranking is a just a computation process. The data is input and the ranks are output. As a first level filter, it can work great.

However, as with any such system, the quality of your data and the process can result in different output. The different weightage to returns is one such process issue.

Also note that the rankings do not take into account the respective fund strategy, investment focus, etc. A fund which has a mandate to hold only 20 or 30 stocks in its portfolio, will rank low on concentration parameters.

If a fund has mandate to hold cash, based on its assessment of the market, that fund will also see a lower ranking in certain periods only because the weightage to the returns parameter is highest.

So, while CRISIL fund ranking is a reference point or filter, as an investor, you need to dig deeper into the funds before you take your final investment call. 

How do you interpret and use the CRISIL fund ranking? What other measures do you rely on to select your funds? Do share your views.

This post was originally published on Unovest.

The post CRISIL Fund Ranking – Take it with a pinch of salt appeared first on Vipin Khandelwal.

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Who doesn’t know about HDFC Mid cap Opportunities fund? It is one of the star funds from the HDFC MF stable.

The fund started its journey in July 2007, almost at the height of the previous bull market. Its current fund managers are Chirag Setalvad and Rakesh Vyas.

The fund seems to have done really well. The regular plan of the fund boasts point to point returns of 28.63%, 20.95%, 26.26% and 17.82% for 1, 3, 5, and 10 years respectively. (see image below)

Compared to its benchmark, Nifty Free Float Midcap 100, the performance of which is 28.32%, 16.91%, 19.25% and 11.49% for the corresponding periods. The benchmark performance excludes dividends.

Even the expense ratio of the regular plan is one of the lowest in what most of its peers charge.

It has been an impressive streak of performance, no doubt.

Yet, every time an investor came asking for advice about this fund, I would say NO.

Why? Where’s the problem?

Source: Unovest. Data as on July 2, 2017. All regular plans.

There is one big problem.

The AUM of this fund now stands at Rs. 16,605 crores. On the basis of AUM size, the next fund in the mid cap category is less than Rs. 6,000 crores.

Given the impressive past performance, brand HDFC and the fact that most investors rely on just past performance to make their investment decisions, the size is only going to grow further.

Please note, for a mid cap fund, large size can be its Achilles heel.

You see, in the entire stock market size of say 100%, about 80 to 85% of the market capitalisation is contributed by large cap companies. About 15% is contributed by mid cap companies and the rest by small and micro cap companies.

With such a limited market size for the mid cap space, a fund such as HDFC Mid cap Opportunities with its size is going to have problems finding investment “opportunities“, sooner than later.

In my view, the fund faces two clear choices:

Choice 1 – Go ahead and play it Warren Buffet style, buy complete businesses and let them deliver. Unfortunately, the SEBI rules will not allow it do so.

Choice 2 – Convert itself into a flexicap / multicap fund, change its benchmark to a broader market index such as Nifty 500 and become unchained to go and seize opportunities across the market.

The second choice seems more probable. And the fund has precedence to refer and follow.

ICICI Pru Value Discovery Fund did the same thing. This Value Discovery fund, which started its journey as a mid cap fund in Aug 2004, was forced to convert itself into a multicap fund in 2015. Driven by its past performance, it received huge fund flows (it crossed Rs. 10,000 crores in AUM).

But wait! Once it converts into a multicap fund, the returns are going to become muted compared to its midcap avatar. After all, mid caps are expected to have a higher risk-reward ratio.

There is going to be yet another problem if HDFC Mid cap Opportunities fund coverts into a multicap fund.

HDFC MF already has HDFC Equity, its flagship fund, in the same category. How can it pit one of its own fund against another one of its well known fund? Double dilemma!

I look forward to see what is HDFC Mutual Fund going to do with its gargantuan sized HDFC Mid cap Opportunities Fund.

  1. Let it grow and end up acquiring larger, though often not so liquid, stakes in mid and small size companies.
  2. Convert it into a multi cap fund and pitch it against its own flagship fund. Yes, let’s have some healthy competition.

Actually, there is a third choice available too. The ideal choice!

Close HDFC Mid Cap Opportunities fund for fresh subscriptions.

Come on HDFC MF, you can do it. Here’s one more chance for you to prove that you are a leader. That you don’t exist only for AUM and you have investor’s best interests in your heart.

Ah! Am I expecting too much? Looks like.

How can the fund house stop the AUM flow? It is like removing the oxygen mask. AUM! That is what the fund management business is for. That is what gives the fund houses their glory. And of course, more AUM means more fees!

Well, HDFC MF is going to take its own call.

I am more interested in what are you going to do as an investor. What will you vote for if the fund house asks you?

Do share your views in the comments box.

Further read: The big bad world of Mutual Funds

The post HDFC Mid cap Opportunities – The fund with a problem appeared first on Vipin Khandelwal.

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Out of the thousand of schemes and options, a mutual fund investor faces a hugely complex job of figuring out those 5 or 6 schemes that should make it to his/her winning portfolio.

Further, once the investments start, there is something more attractive that keeps showing up.  Then there is  opinion from the media and the experts.

A lay investor is confused to no end.

It pains me to see portfolios turning bulky with the large number of schemes in the portfolio. Most of these schemes don’t add any unique value. The only lure you have is of the recent past performance. Apart from that there is hardly anything worth considering.

Now, when you select a mutual fund, there are a set of useful parameters that you should consider.

You should look at the investment objective, compare the scheme with other similar schemes, look at various qualitative factors and give a due thought if the scheme actually fits into your portfolio. But I guess this is too much to handle.

I just so wished that there was a way I could help you focus on all the above parameters and and more and help you take a considered decision.

After several months of thinking through, I believe I have come up with a tool that you can make use of. It is a simple 20-point MF selection checklist. 

What can a checklist do?

A lot. A checklist is a very simple process management tool that is used by a pilot as well as a nursing staff in an Intensive Care Unit of a hospital.

If you want to know more about the power of checklists, read the book “The Checklist Manifesto” by Atul Gawande.

Coming back to our problem whether you should invest in your shortlisted mutual fund scheme or not, here’s the checklist for you.

Actually, it is more than a checklist. It is a checklist cum questionnaire.

This is how it works.

  • You have already have a shortlist of one or more schemes that you wish to invest in. You have applied your own criteria in selecting these fund schemes.
  • Now you come to the Unovest MF selection checklist and put on trial each of the shortlisted schemes – one by one.
  • You answer about 20 questions on the scheme, some about your own profile and your portfolio.
  • Once you have done that, a behind the scenes calculator runs through your answers and tells you if you should consider investing in the scheme or you can avoid it.

The checklist will help you get a more comprehensive perspective through its questions.  It helps you answer the question “Should I invest in this fund?”

It is important that you read the MF scheme Factsheet or keep it open as you work through this checklist/questionnaire. 

Click here to know more on reading a factsheet.

Will it work for you?

The best way to find out is to use it.

Click here to download the Unovest – MF Selection Checklist.

Let’s also see what this MF selection checklist is not going to do for you.

It is not going to give you any names of mutual fund schemes you should invest in. Once you have selected names you can use this checklist cum questionnaire to assess whether you should go ahead with it or not.

Use it and let me know if this works for you.

I am happy to hear your suggestions to improve it and make it work better.

Click here to download the Unovest – MF Selection Checklist.

The post Should I invest in this fund? Use this 20 point MF Selection checklist appeared first on Vipin Khandelwal.

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