ETF vs large caps

If you have read the coffee can investing the book talks about why an etf is better than a large cap fund . This is especially true now that the large cap world has been defined as the top 100 stocks in the country.

Basically the etf is a passive investing option where the etf tracks the nifty or the sensex. Usually the tracking is accurate to the high 90%. Some gaps remain due to additional funds or redemption which the etf manager needs to manage.  Because of the passive nature of the fund this yield the cost of management to be very low.

When you compare that to the large cap funds the cost of management or the TER ratio is in the range of 2% every year of your NAV.

Now if you believe that the alpha ( ie the difference between the active fund and the passive fund) is very low then the gap in the TER is actually a fillip to your returns over a long term period... and this 2% gap can give significant jump  your returns over a 25 or 30 yr period ( i will give the exact details in another post).

So nowdays a lot of people are actually propagating people to go for etf vs large cap funds.

I think it makes lots of sense...

Its simplefinancialsense

Save tax on fixed deposit interest

All interest that one makes on savings accounts or fixed deposit is taxable in your hands . It is considered as part of other income in the tax returns.
Any interest over 10,000 Rs is also tax deductible at source.

Now lot of us keeps money in savings accounts and also invest in fixed deposits.

On savings account one earns around 3.5 % and post tax is 2.31% or if invested in fixed deposit @6.5% post tax is 4.29%

Now my advice has been to invest in liquid funds vs keeping money in the bank account . The liquid funds will give around 6% pre tax returns but is still taxable in your tax rate .

This tax needs to be paid because these are all debt products and hence tax is applicable even post three years.

There is one product which is an equity product which enables this to be tax free in one years time.

This is called as arbitrage funds . These have been giving around 5-5.5% returns which when invested for more than one year will be tax free... Which means more than the 4.3% returns from fixed deposit.

This is an interesting product and can be used to get the 1% additional benefit as compared to fixed deposit or more than investing in the liquid funds for emergency fund.

This is a good way to get better returns. Investing in it is good opportunity.

Use it if you can wait for more than one year .. that's simplefinancialsense

Cut out the bank and double your money in half the time

The bank is an intermediary, a  financial "dalal" - though it is only of the many roles it plays in our daily lives.

The heading may sound sensationary.. but it is meant to be because it is one of the ways the bank makes very significant amount of money.. by using your money and lending to others.. " ek haath lo.. doosra haath do" phenomena.

There are functions of a bank that cannot be replaced and cannot be disrupted and we should continue to use them

Let me explain..

When banks lend to individual and businesses they do so nowadays at what rate.. almost 11% interest per annum .

And when banks pay you for your fixed deposit or for your savings account money,  They pay you at 6% and 3.5% respectively.

So for every Rupee you deposit with them they can convert it to an income of almost 2 to 3 X of potential profit for themselves... it's a fantastic way to make money !

Of course there are also costs of doing business, real estate, employees, technology and potential of default which reduces their net interest margins to the mid 20% range.

But what the above tells you is that the best business ( apart from being the government who can tax you at unreasonable levels .. imagine a 18% tax on eating out!) Is that of being a bank.

So.. what kind of options are there to avoid paying all of these differential costs if you are a person with a better financial credit score and practices.  Below are some ways which I have been reading about .. some which i do.. and some which i need to read and execute to understand better..

1. Invest directly into mutual funds.. liquid and debt

There are multiple debt funds which give you 7-9% risk based returns ( this is different from the fd where it is guaranteed. As one goes higher up the return list, the risk gets transferred to you.. this is very important to understand ). But the risk is not very large and can be borne by the investors.

Here is a link which talks about different debt funds ( initial part of the video) which very nicely explains this . ( it's a video from cnbc awaaz)

There are some good ways one can invest in liquid funds and also in debt funds .. as good as safety in the bank and as good as money that can be quickly accessed as required.

2. Peer to peer lending

Now banks do what. They lend to individual and businesses. At high rates.  So if any website or business can bring the investor and the entity requiring funds together .. it's a great opportunity to cut the intermediatary out and get higher returns.

These are done by peer to peer lending websites.  They can give you 8-12% returns. One of course has to do a lot of due diligence to ensure you are lending to the right company and have a good chance of recovering your money back. ( remember while the banks make upto 2-3 X of revenue their NIM  is only 20-30%).

So if you can ensure that you do the right due diligence you can make good returns.

So.. in short one can using the above two ideas double your interest returns vs what one makes in keeping money in FD and savings accounts.

What this means for you ? Your money will become double in half the time it was being doubled earlier.. or four times in the time it was being doubled earlier.. or 16times in the time it would take to become 8 times

It's powerful concept... one that requires you to be smart and driving methods to do this..

It's simplefinancialsense

Don't forget to subscribe . Comments are more than welcome

Understanding Risks of SIP- MUST READ

Today the mutual fund industry is on a high! Every month there is like 4000Cr that is coming into the MF industry using the SIP route - amazing.. this is like almost 700MM every month!

SIPs are a great way to create disciplined wealth, disciplined investments - making automatic payments from your pocket- save first- spend later method.

There are advertisements coming into the newspapers nowdays where MF talks about how a Rs 10K Sip from 1996 is now worth 6Cr Rs!


However , are there any risks to the MF investments- what do we need to know - What should we be aware of in terms of the risks of the MF that we so confidently invest in- leaving our money with the highly paid money managers...

I was going through a very nice YouTube video by Sunil Minglani which made me think that I should share with all what this really means... if in my entire posts you must read something-- this is the one that you MUST read


Here are some key insights if you are unable to watch the video to the full ..


1. Mutual funds can ONLY SELL shares beyond their remit IF they are being redeemed.

What does this mean? This means that assume that the fund needs to invest 90% of its money in equity, then it cannot sell below 90% even if the market is falling! They can of course change the shares- but 90% must be invested!

They will need to continue buying and holding shares when the market is falling... if there is no redemption pressure from you as an investor!!

I thought that they had the ability- but it seems that they cannot get out of the market if the market is falling..

the opportunity of course improves when one is holding balanced funds- then the 90% can come down to 65% or if you have a ULIP then you can do this yourself by changing the fund type!

2. They cannot SHORT SELL . They can only buy.

This as per SEBI rules, while PMS and other FII can also short sell. This again ties the hands of the MF manager significantly in a downward trend market.


So, what does this mean..for you and me as a MF invester.

We need to take the decision and switch funds- the MF manager cannot do anything apart from some very small changes in any non balanced fund type of equity product. They can only select stocks that can be strong and continue to manage the downward trend.

Enclosed is the fund sheet for Mirrae Asset Emerging Bluechip fund for June 2017 ( from moneycontrol.com). Its one of the top rated funds... and is giving great returns.. But take a look at the Options it has..

Now- Does this mean I am suggesting that we stop SIPs.. absolutely not. The fundamentals of SIP still remain valid. One should still continue with SIPs.. But here are the few things that you and I can do if the market if falling..

1. Switch funds to more balanced funds or debt funds.. If the change is happening with the same AMC I don't think there are any charges that apply ( I need to check this)
2. Be ready to redeem- so have your access to the websites ready if you want to change AMC.
3. As we mature, think about investing in Stocks where one can sell if required... it might make sense.


SIPs is great- we should invest using the SIP method- but we should also know the limitations of the MF managers- and not fully assume they can take care of everything... we need to know the Plus and the minus--

Now that's Simplefinancialsense!

Direct plans of MFs - links and comparison of benefits

In continuation with my previous post, I saw an article in the economic times today ( while browsing on the ET app on my mobile) on some more information on Direct plans.

In summary, most HNI investors ( 65% assets) are using the Direct plans vs the retail customers where only 12% are using the direct plan way of investment.

This again is quite a big gap- Just showing that the smart money is using this method to drive more results.

Below is a quick demonstration of an investment profile of an initial start of 10L Rs and then lump sum investment of 2.4L per annum



As you can see over a 10 yr period assuming a return of 12% in direct plans, the difference can be a whopping 9.7L additional benefit to you the investor.

Now of course with moving to direct plans, it does come up with significant additional work.. and you need to decide if it is worth it.

Make the decision.. its simplefinancialsense

	SIP amount	Regular plan return	Direct plan return	Regular plan corpus	Direct plan corpus
Start	1,000,000	12	13.5	1,120,000	1,135,000
Yr 1	240000	12	13.5	1,523,200	1,560,625
Yr 2	240000	12	13.5	1,974,784	2,043,709
Yr 3	240000	12	13.5	2,480,558	2,592,010
Yr 4	240000	12	13.5	3,047,025	3,214,332
Yr 5	240000	12	13.5	3,681,468	3,920,666
Yr 6	240000	12	13.5	4,392,044	4,722,356
Yr 7	240000	12	13.5	5,187,890	5,632,274
Yr 8	240000	12	13.5	6,079,236	6,665,031
Yr 9	240000	12	13.5	7,077,545	7,837,211
Yr 10	240000	12	13.5	8,195,650	9,167,634
		Difference over 10 yrs	971,984

Direct vs Regular plan in Mutual Funds

There are two different types of mutual fund plans and it is absolutely critical than we understand what these are... The reason.. it can make a significant difference in the money that you will make..!!

What is a regular plan
This plan is basically bought through a broker. The broker is a middleman ( a financial planner , a broking house , a bank) who is enabling the purchase of the mutual fund by the investor. 

In this case, the middleman is spending their resources to sell , fill in the forms, take the form to the mutual funds house etc.

Now to keep these middleman interested in selling their wares, they give them a commission .. almost 1- 1.5% of the overall investment that the investor has in the mutual funds... every year!

This is not unfair.... these middlemen are their sales reps.. so of course they need to be paid. They are also doing a service for you... so if they are not charging you then this is a nice fees for them.

What is a direct fund

A direct fund is a scheme where the mutual fund house bypasses the middleman and allows the investor to directly interact and invest with the fund house.  When this happens the mutual fund doesn't need to give the commission and it passes on the 1-1.5% to you as lower fund house costs thus increasing the returns they are able to provide to your portfolio.

Of course this means that the onus on you as an investor increases quite a bit . You now need to go to the website of the fund houses and make a payment, you need to get the entire paperwork done and you need to keep a track of all of your investments because they are now in different places .

Now.. Let's look at this.. does it make sense to go for direct plans .. and do all that effort. Here are some pointers.

1. Now days all of the mutual fund houses have good decent websites from where you can purchase the sip or any lumpsum investment.

2. The fund houses will also enable you to track your investments.. but only for their find house.

3. One can even use the same websites to redeem the portfolio if so desired.

So.. it's no longer too difficult to make the middleman go away... because the amounts can be quite a big one.

So if you have 30 l portfolio then the person is making somewhere around 30- 45  thousand a year on your investment.. this can be a significant amount . . Especially as you look at a multi year portfolio.

It is best to get onto the bandwagon of direct plans.. it take a little effort.. but spending that effort is truly worth it. .. and it's simplefinancialsense!!