Mutual funds and ETFs
What does a fund really cost you, and what are you actually holding?
11 of 11 chapters published
Chapters
Beginner
- What a mutual fund isMoney pooled from many people, invested by a manager, and owned as units. The part worth knowing is the structure around it — a trust, a sponsor, trustees, a manager and a custodian, none of whom is the same entity.
- NAV, and what it is notNet asset value is the fund's assets minus its liabilities, divided by the units outstanding. It is not a share price, a fund with a ₹10 NAV is not cheaper than one at ₹500, and buying before a payout gains you nothing.
- What it costsThe expense ratio is capped on a sliding scale that falls as a fund grows, it is charged daily out of the NAV so you never see a bill, and the same scheme sold two ways costs two different amounts for identical holdings.
- How to buyWhich day's NAV you get depends on when the money reaches the fund, not when you pressed the button. A SIP is a schedule rather than a product, and the growth-or-payout choice is a tax decision more than an income one.
Intermediate
- The categoriesSEBI standardised scheme categories in 2017 so that a fund's name has to mean something. The definitions are mechanical — large cap is the top 100 companies by market capitalisation, and the list is republished twice a year.
- Index funds and ETFsBoth track an index; only one trades on an exchange. An ETF's price is set by buyers and sellers rather than by the fund, which means it can differ from what the units are worth — and needs a demat account to hold at all.
- Reading a factsheetEvery fund must publish its full portfolio monthly, and debt schemes every fortnight. It is the most under-read document in Indian investing, and it answers questions the return figure cannot.
- The riskometerEvery scheme must carry a six-level risk label. It is a genuine improvement on nothing at all, and it measures the risk of the portfolio rather than the risk to you — which are different questions with different answers.
Advanced
- Reading performance honestlyA published return is net of expenses and not of exit load or tax, measured from a date somebody chose, against a benchmark that may be the wrong one, by a fund that survived. Each of those is fixable, and each is usually skipped.
- The cost hurdleA fee is not a deduction from the return; it is a head start the manager has to make up before you are level with the index. The arithmetic of that hurdle is the whole active-against-index argument, and it is not close to neutral.
- Choosing and holdingTen questions that can be answered from documents you are entitled to, and one habit that matters more than all of them — deciding in advance what would make you sell, so that a bad year does not decide it for you.