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Mutual Funds - Dog and the bone story
Posted On Monday, Jun 02, 2014
It is summer time and kids have vacation. It is joy to watch them play. Late afternoon on a Sunday, I watched them play the Dog and the bone. I enjoyed the game during my childhood and even as an adult on family picnics. There are two teams standing in two corners and at the centre is the prize, called the “bone” and one member of each team would come to the centre and try to take away the prize to his team’s corner. “Blink” and the other team could take away the bone. Every trick was used to distract the opposite team member and take away the “bone”.
As my thoughts wandered I realised that in some sense it was a dog and the bone game between the investor and the mutual fund industry. I couldn’t resist comparing this to the mutual fund industry.
"Blink" and as an investor the returns could be eaten away by opaque and unjustified costs. The two tables below illustrates the optical illusion or the distractions used to make the investor "blink"
| Average AUM (INR) | 100,000 | 100,000 | 100,000 | 100,000 |
| Gross returns | 15% | 8% | 15% | 8% |
| Expense as % of avg. AUM* | 3% | 3% | 1.25% | 1.25% |
| Net returns | 12% | 5% | 13.75% | 6.75% |
| Gross returns in INR | 15,000 | 8,000 | 15,000 | 8,000 |
| Expense in INR | 3,000 | 3,000 | 1,250 | 1,250 |
| Net returns in INR | 12,000 | 5,000 | 13,750 | 6,750 |
*Equity mutual fund scheme
^The table used above is for illustrative purposes only
The optical illusion is the expression "expense as % of avg AUM". If this was to be converted and looked at “expense as a % of Gross returns”, then the numbers communicate a stronger message. Even if you win the prize, lot of juice would have already gone.
| Average AUM (INR) | 100,000 | 100,000 | 100,000 | 100,000 |
| Gross returns | 15% | 8% | 15% | 8% |
| Expense as % of avg. AUM* | 3% | 3% | 1.25% | 1.25% |
| Net returns | 12% | 5% | 13.75% | 6.75% |
| Gross returns in INR | 15,000 | 8,000 | 15,000 | 8,000 |
| Expense in INR | 3,000 | 3,000 | 1,250 | 1,250 |
| Net returns in INR | 12,000 | 5,000 | 13,750 | 6,750 |
| Expense as % of returns | 20% | 37.5% | 8.33% | 15.6% |
*Equity mutual fund scheme
^The table used above is for illustrative purposes only
A high expense fund tends to lose a lot of the returns generated. In a year when the returns are modest, the high sort of semi fixed expense eats away a substantial chunk. In the above example it could be as high as 37.5%. I have considered only positive returns scenario. A negative return scenario would be even more devastating.
Sure, there will be some costs and expense, as the asset management industry cannot run without remuneration. However the higher expense ratio needs to be questioned by the investor. Maybe that commission which the mutual fund paid out to your distributor was not worth it. Did he advise you or did he just pick up the forms? Ask your fund and you may get some interesting answers. Maybe it is a better idea for the investor to compensate the distributor rather than the mutual fund.
In the above example only one year was considered. Imagine the impact of such juice being lost over long periods of time. It can make a huge difference to your lifestyle.
At Quantum AMC, we will not increase our current expense ratio of 1.25 per cent (one of the lowest in the industry) for our flagship product - Quantum Long Term Equity Fund# and continue to believe in what is one of the cornerstones of the Quantum Philosophy to offer low cost products while maintaining transparency to our investors.
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* Investors should consult their financial advisers if in doubt about whether the product is suitable for them. Note: Risk is represented as:
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Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts 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. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.
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