Expense Ratios, Exit Loads and Miscellaneous Stuff

Even though most people may understand this very well, let us define some terms at the outset so that there is no confusion.

Expense Ratio

This is charged by the fund house (AMC) to the scheme (investors money). Investors want this to be the lowest. (Conversely AMCs “may” want these to be the highest)

Entry / Exit Load Type 1

Although there is no financial term like Type 1, this is my own creation for simplicity sake. In this type, the entry and exit load (fees) go to the AMCs or Distributors. This is in addition to the expense ratio above. Obviously investors hate them.

These type of loads have been ELIMINATED in India. This elimination was not without its own share of controversies. More on this later. Continue reading

Occupational hazard

One of the occupational hazards of being in the financial markets is the constant requirement to predict. Clients want predictions and so does the print and electronic media. One has to predict the GDP growth, election results, monsoons, sovereign defaults and so on. The range of predictions given out by people in the financial community would put astrologers to shame.

Usually I tend to make predictions (whenever I cannot avoid making them) and then forget them rather than remind myself of past follies.  It is in this context that I was pleasantly surprised when I came across this old article. It is not often that predictions turn out right and I could not resist the temptation to gloat! (Adjustments are required for bonus / splits in share prices, BSE Sensex was trading in the range of 12,500 to 13,000 at this time)

Omaha diary

Warren Buffett describes the meeting of shareholders of Berkshire Hathaway held in the beginning of May each year as ‘Woodstock* for Capitalists’. In a way the description is apt. Just like the crazed music lovers who descended for the original Woodstock, faithful investors numbering to about 40,000 land up in the mid-western American town of Omaha to listen to the jugalbandi of Warren Buffett and his partner Charlie Munger.

* Woodstock was an open air music festival held over three days in 1969 which attracted a crowd of 500,000 enthusiasts.

Woodstock for capitalists

Picture of a section of the Qwest Center hall before the start of the meeting

For any serious investor especially from the value investing school, this is a must do thing at least one time. I had an opportunity to attend the meeting this year and it was an amazing experience.

Continue reading

Structured Products next?

ULIPs will cease to be very attractive for distributors from September 1, 2010 considering the new guidelines. In the past we have seen that whenever one vehicle becomes unattractive to distributors they immediately latch on to another vehicle. We have seen this in the mutual fund space where investments would be churned out of an existing scheme and re-routed to a new fund offer to get the upfront commissions. Later when entry loads were abolished on mutual funds we saw investments shifting to ULIPs.

Now that ULIP commissions have been reduced and lock-in period increased, one could see distributors shifting focus to Structured Products in the form of equity linked debentures. Structured Products are products which do not fall directly within the purview of either RBI or SEBI. The margins to the distributors are also opaque to the investor. In short, all the ingredients for increased volumes are there!