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

Stop sitting on the fence

This article was published in Business Standard on Sunday, September 30, 2012


After lying low for a number of years, there are several reasons why retail investors should look to the stock market

For the past two years or so, if any retail investor asked a ‘financial expert’ whether this was the right time to invest in the stock market or not, the answer would invariably have been, ‘Refrain for the time being and enter when there is more certainty’. Investors appear to be taking this advice rather seriously.

We read reports in various media as to how retail investors have jettisoned stocks and fled to safer havens such as gold. This phenomenon is not restricted to India alone. The abiding global sentiment prevailing today is that stocks are ‘risky’ and should therefore be avoided. The grief-inducing headlines in various newspapers are further cementing this belief (the past two weeks notwithstanding). Everyone says that they will invest when times are ‘more certain’. Continue reading

How to build a portfolio

Jayant Pai | jayant@ppfas.com

Before jumping to build a portfolio of stocks impacted by the recent reforms, choose the ones which will benefit the most.

This article was published in Business Standard on September 23, 2012.

Three Fridays and three sets of good news – ECB President Mario Draghi’s promise to buy unlimited bonds, Ben Bernanke’s commitment to purchase mortgage backed securities worth $ 80 billion a month, along with diesel price hike by the Indian government and Mulayam Singh Yadav’s commitment that the UPA will not be destabilised soon – has brought the smile back on stock investors’ faces.

While the exultation is, no doubt, justified, this may also be a good time to dwell on how the impending changes may affect our investments going ahead.

While the hike in diesel prices and a reduction in the number of subsidised LPG cylinders may have invited the ire of consumers, it is expected to help equity investors in two ways:

Other things being equal, an impending reduction in the fiscal deficit will accord greater flexibility to the Reserve bank of India, who have so far, been lamenting that yawning deficit is acting as a big barrier to any further interest rate cut.

A cut in rates, apart from helping borrowers, also results in the lowering of the hurdle rate for investors in equity markets, by reducing the attractiveness of fixed income instruments.

Currently, the earnings yield for FY13E (calculated as 100/PE ratio) is around 6.50 per cent while the yield on one year fixed deposits is around 8.50 per cent. As rates taper off, this yield differential will reduce and PE ratios should expand even if earnings remain constant.

Also, an improvement in the country’s fiscal will reduce the threat of a credit rating downgrade. This in turn, will help corporates keep their overseas borrowing costs in check, which could percolate down to healthier earnings. The positive effect on the Indian Rupee also cannot be understated. It has already perked up nicely over the past few days. All-in-all, if all goes according to script, equity investors should be awakening to a new dawn and the golden age of high fixed income returns may be ending.

While all this sounds enticing, it would not be remiss if investors asked “What next?”. In other words, while the entire market will benefit, which stocks should they pick? Well, here are a few pointers for avid stock-pickers who want to build a reforms-oriented portfolio.

Don’t judge a book by its cover 

While the changes announced in certain sectors will contribute to their overall growth, it does not mean that all the listed companies therein will benefit equally.

For instance, the entry of foreigners (albeit through joint ventures with an Indian partner) could actually increase the competitive intensity in a low-margin sector like retail. Also, incumbents may not be attractive enough to be bought out. Besides, if a listed Indian player enters into a joint venture with a foreign entity, their focus in the listed entity may get diluted. Even if that does not happen, future expansions may happen through the unlisted entity.

In the case of aviation, while most of the current crop of listed companies are in dire need of resuscitation, foreign investors will only be deem them attractive once clarity emerges on operational fronts such as aviation turbine fuel pricing, sharing of airport infrastructure etc.

Also, while liberalising the FDI regime in a complex sector like pharmaceuticals is welcome, foreign companies who have bought out Indian promoters have not had a very good experience so far, as various issues have cropped up after their purchase. Even today, issues like compulsory licensing dog the sector. Hence, here too it may not make sense to blindly chase Indian pharma companies these scrips in the hope that they will sell out soon.

Read between the lines

There are some other reforms that have still not happened and does sound ‘marquee’ but which can have far-reaching implications.

One of them is the restructuring of the State Electricity Boards and the other pertains to the Land Acquisition Bill.

The former should not only assist several banks who have lent to these companies, but also inspire greater investor confidence in the power sector. Clarity on the latter will certainly help most of the large Indian corporate houses who are involved in infrastructure and extractive industries.

Even property developers may benefit. However, once again, invest only after assessing the beneficiaries and the approximate extent by which they will benefit.

If all this sounds too daunting, participating in the stock market through mutual funds is a good option. If choosing a good scheme is too laborious, an index fund may suffice.

Information overload?

Jayant Pai | jayant@ppfas.com

Don’t get confused. Create a reading list of your favourite newspaper, website, research house to take informed decisions

This article was published in Business Standard newspaper dated September 2, 2012

Buy ‘X’ share, sell ‘Y’. Stay invested in mutual funds… exit some schemes. Outlook for gold is good…sell gold…

Different channels, newspapers, websites, blogs, research reports… sure, there isn’t dearth of information. While business channels and magazines were anyways into an overdrive, many general news channels have also jumped into the fray. The worry: Much of that viewership is only for the daily stock market related programmes and not for other personal finance programmes. And even among personal finance programmes, many question sonly pertain to stocks, with other aspects (such as insurance and mutual funds) taking the back seat.

It is, therefore, surprising that despite our seemingly avid interest in the stock market, every day we hear that retail investors are exiting the market or stopping systematic plans and so on. In fact, the quantum of wealth actually invested in stocks is barely 4 per cent. Even mutual fund distributors have actually come down, and not gone up. Though many blame it on the entry load ban, the jury is still out.

Obviously, this overload of information and the so-called keenness to know about stocks and their future has not translated into much real money coming into the markets or for that matter, mutual funds. Why is this so? Some of the reasons could be:

Too many advisors but no accountability

This is paradoxical but true. Rather than increasing the number of investors, the rate of rise in the advisors hasn’t really helped them. Though there is no data to back this up, one can clearly see it from the absence from retail participation in the market.

Many complain that they are confused by diverse views. The fact is that it does not take much to be a stock market pundit. Spout a few words of jargon, pop-up on a couple of business channels and voila… you have a fan following. Follow this up with a website dedicated to proffering “advice” for a subscription fee and you are ready to go. However, when it comes to accountability for the advice, these people turn coy, blaming everything (even acts of God), except themselves when stocks do not perform the way they say they will. There is also no rating system of how many ‘hits’ or ‘flops’, these so-called advisors have.

But if any retail investor has burnt his/her fingers by putting their money on their advice, the financial loss is good enough to put them, perhaps, even their near and dear ones off. In other words, the absence of accountability hurts the overall sentiment towards stock markets very badly, as many stop investing after being saddled with a few dud recommendations.

Too much data but little explanation

Till recently, research agencies would criticise companies but not give a ‘sell’ because the banking or broking or other arms of the group would lose business. While much of that has changed because of overall bad market conditions, investors are often confused that even after reams of data pointing against a company, why seldom there is a ‘sell’ recommendation.

In other words, there is a “Tyranny of Choice” when it comes to market information. The ticker rules our lives (thankfully, we are spared on weekends), we are bombarded with statistics of all hues, be it the cash segment, F&O segment, institutional activity, quarterly results, etc. Unfortunately, just as a glass can hold only so much water, our brain ceases to process information beyond a point.

Feeding it with more makes it freeze into inaction. Many are in that state nowadays, overawed and overwhelmed by the deluge of information, but there is seldom concrete solution or recommendations.

Few can stomach volatility

We are spoilt. In the good old US-64 days, we were promised 18-20 per cent without any labour. Despite the realisation that the scheme had to be stopped because it promised too much without the fundamentals supporting it, we still want to live in those good old days.

Often people inquire with me as to which stock is a good investment. While I do not have an idea a day, I do name a few good stocks once in a while. However, after a few days or weeks when I ask them whether they have invested, most of them say they have not done so, because the market is too volatile right now and they are waiting for it to stabilise. Well, I often joke that markets are stable only over the weekend and that too because they are closed. Volatility is part and parcel of any market. If you cannot stomach it, you should not be inquiring about stocks in the first place. Also, the media, instead of assuaging the viewers actually feeds on such volatility and makes mountains out of molehills making remarks like “Market crash reduces investor wealth by thousands of crores”. Extreme statements like these, scare off several potential investors who are sitting on the fence.

I think the best way to deal with this situation is to cut ourselves off from the clutter. Mentally, we can create our own list of favourites such as one favourite TV channel, one favourite website, one favourite magazine, etc. and stick only to those. They usually talk about the same developments anyway. With regard to self-styled advisors, zero may be a good number… After all, often their guess is as as good as ours.

Also, it would help if we changed our mental model of investing from one of action to one of inaction. Every source mentioned above (stockbrokers included) want you to do something. The shorter your horizon the better for them as they generate more income off you. Well, frustrate them by holding on to good investments for long periods of time. Stop being the sacrificial lamb at the altar of their greed.

Finally, treat volatility as a good friend who actually helps you buy good stocks at reasonable prices during panics.

The mutual fund industry: Waiting for Godot?

Jayant Pai | jayant@ppfas.com






A journalist called me up last week asking for my views for a story that she was working on. It dwelt upon the fact that investors were deserting mutual funds in droves as they were disillusioned by a lacklustre market. So much so that the Prime Minister himself was sorry to see the state of the industry and was keen to lend a helping hand. She then asked me what could mutual funds and the Regulator do to ‘attract’ investors once again.

If she was hoping for some revolutionary ideas from my side she must have been disappointed…as I told her that nothing more or new was required. I was neither being defensive nor escapist when I said this… Continue reading