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Friday, March 19, 2010
1.What is Tracking Error? How does it affect the fund’s performance? - Pravin Dhawale
Tracking error is a tool to measure the performance of a portfolio. Tracking error is the standard deviation of the difference between the portfolio return and the benchmark return. It helps you to measure “how much of your portfolio return deviates from the benchmark” over a return period, and how volatile are those deviations.
In the case of active funds (where the fund manager can decide the investment strategy), you could look at a higher difference between the portfolio return and benchmark return. While in the case of a passive fund (where the fund manager follows an index or commodity), lower the tracking error, better is the performance of the fund.
Rationale for low tracking error in the case of a passive fund: you do not want to take the risk of a fund manager’s skill. You just want the fund manager to invest in an index or commodity and not take a call on when to invest. For example in the case of gold ETF, you would want the fund manager to invest immediately in gold when he receives the fund, so that the performance of the fund tracks the performance of gold closely.
Thus, the tracking error does not affect the performance of the fund; it is just one of the measures to study performance.
2. I am a long term investor in Mutual Funds and have some investments that are doing well. On the one hand I feel it is fine that one remains invested in these funds. However, I am being advised that since the market is currently doing well it is better to book profits and choose other funds that are doing better and reinvest at an opportune time or when the market is lower. Of course one will have to be sure to time things well enough, make correct selections and pay the entry loads. Remaining invested will see one continuing have the notional profit on paper, but actually there is no profit that has been obtained.
What is your advice? – Praveen S
Simple advice: Remain invested if you do not require the cash.
If you plan to sell and reinvest, then you would have to consider all the below mentioned pointers:
1. Sell at the most appropriate time
2. Markets have to go lower
3. Identify other investments at the right time
4. These other investments have to do well
5. You have to invest before the markets move up
All the above require perfect timing. You may be lucky a couple of times to be able to time this well; but not always.
Suppose you do this perfectly and gain confidence, you may repeat it more often in future.
You could be right about this when you are in your – Twenties-Thirties-Forties…
And suppose after accumulating all this wealth, your judgement when you in your fifties goes wrong! Wouldn’t that have a serious impact on your wealth then?
So in case you make 100% return on every trade you under took excepting your last trade, mathematically you would make:
100 x 100 x 100 x 100 x 100 x 100 x 100 x 0 = 0.
Hence if you trade too often, then your wealth will be dependant on the final trade you make.
Rather than take these risks, it makes sense to invest in good funds and allow it to compound over long periods and then have a systematic exit plan as you grow older.
3. Everyone says that SIP is the best option to invest in Mutual Funds but not for direct equities. How do they differ from each other? To me, either equity or mutual fund, we are buying at same market price. What is the real difference? – Naveen Yakkala
The option of investing ‘systematically’ either in a fund or in direct equities is a wise choice. In either case it should work. However, in the case of equities, if you end up identifying an equity, which does well for many years, you may end up averaging at higher prices. However, in the case of mutual fund since there is a basket of stocks underlying the fund, you may have more opportunities to invest in good and bad times thus getting a better average. In a basket of stocks some stocks may do well and some may not, thus the fund could be moving up and down every month giving you more opportunities of averaging.
Disclaimer:
The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.
Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trust Act, 1882. Sponsor: Quantum Advisors Private Limited.(liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited Investment Manager: Quantum Asset Management Company Private Limited
Mutual Fund investments are subject to market risks. Please read the Scheme Information Document / Key Information Memorandum / Statement of Additional Information /Addenda carefully before investing.