Thursday, November 22, 2018

SEBI ends AMC malpractice in direct plans

Last time I wrote about how SEBI is making multiple changes to the investing framework to make investing more transparent and equitable for retail investors. I also bemoaned the general apathy of the retail investing community towards these changes which is the single biggest reason why these changes are not yet making the desired impact. It turns out however that the apathy of the investing community is so taken for granted by the AMCs that some of them have actually been taking rampant advantage of their ignorance and indifference to favor the distribution community, much to the displeasure of SEBI and definitely in contrary to the spirit of the SEBI guidelines. Here is how investors have been taken for a ride by these AMCs.

Remember how SEBI mandated AMCs to introduce direct plans in all schemes for the benefit of the retail investor who wanted to avoid distributor commissions. This was a very welcome move by SEBI intended to reduce the cost of investing for savvy investors or those who took the services of an advisor. Considering that AMCs pay between 75 to 125 bps as commission to distributors, the TER (total Expense ratio) of direct plans was expected to reduce in the same proportion compared to regular plans. However, would you believe that AMCs actually raised the fees in direct plans to compensate for revenue losses that they incurred in regular plans for having to reduce charges in those plans due to ceiling guidelines? Many leading business newspapers have reported on this prevailing malpractice which you may read on these links – Economic Times, Live Mint and Business Standard. This is a clear case of favoring distributors over investors by AMCs and a violation of their fiduciary responsibilities towards their Customers. It also contravenes the spirit of the ‘Mutual Fund Sahi Hai’ campaign that the MF industry has been promoting diligently for so long now.

Well, the good news is that this malpractice is set to end soon. Taking note of this malaise SEBI’s circular on transparency in TER of mutual fund schemes has directed that the difference between the TER of a direct plan and a regular plan should at least be equal to the distributor commission. In effect, it means that expenses towards distributor commissions should be booked in regular plans only – they cannot be booked in the direct plans. This guideline is expected to reduce the TER of direct plans in the coming months and investors should start getting notified about these changes from AMCs starting Jan 1 2019. 

What to Do
This is yet another opportunity for investors to increase their returns from Mutual Funds by making the switch from Regular plans to Direct plans. The best way to do this is however is to review your financial goals with the help of a financial advisor and plan the switch in a manner that can best address those goals. A SEBI Registered Investment Adviser is best qualified to help you in this process.

Saturday, November 10, 2018

SEBI bans upfront commissions to Mutual Fund distributors

Last month SEBI asked Mutual Fund Asset Management companies (AMCs) to stop paying upfront commissions to distributors and instead adopt a full trail model of commission in all their schemes. This is a very admirable move by SEBI, to the large discomfort of a lot of distributors who had made a practice of earning extra income by churning their client’s portfolios frequently. Such upfront commissions were in the range of 1 to 1.5 percent and hence very lucrative to distributors. Each churn earned them an upfront commission from the AMC at the cost of the beleaguered client who was left to wonder why her MF investments were not delivering the expected returns.

This move by SEBI is the latest in a series of moves by the regulator in order to bring greater transparency to the Indian Mutual Fund industry for the benefit of retail investors. Some of these include:

  • Removal of entry loads in all schemes of all funds
  • Introduction of Direct plans in all schemes of all funds
  • Capping of maximum Total expense Ratios
  • Tapering of Total Expense Ratios by Assets under Management
  • Mandatory disclosure of expense ratios by mutual funds for all schemes
  • Mandatory disclosure of any and all changes in expense ratios to existing investors
  • Standardization in the naming of mutual fund schemes to prevent confusion
  • Mandating fund houses to use TRI (Total Return Index) v/s PRI (Price Return Index) for benchmarking performance of funds
  • Introduction of the ‘riskometer’ – a five point scale from low to high – to enable investors better understand the risk associated with the fund.

The point of all this is to understand that the regulator is taking proactive steps and making changes to the investing framework to protect the interests of the small investor. Yet none of it will succeed if investors themselves choose to remain uninformed or uneducated about the benefit of these moves. Many a mutual fund investor has become so used to the prevailing system of investing via mutual fund distributors that they are averse to take advantage of the new framework even when it is in their own interest.

What to do

The simplest thing to do is to switch over from regular plans to direct plans of the same fund. The difference in expense ratio between a regular fund and a direct fund of the same scheme can be up to 1.0%, and when this difference is compounded say over the next 10 years, it can mean an additional return of more than 9%! In other words, if you have Rs 10 lakhs invested in a regular plan today, you can earn an additional 208,000 over the next 10 years just by moving to the Direct plan now (assuming a 8% return on the fund in the regular plan).

But hold on, just making a blind switch is not in your best interest, if only because it will lock you in for the next one year (remember exit loads). So if you are convinced about the need to make the switch you will be better off contacting a SEBI RIA to go over your financial plan and link your investment plan to your financial goals. Working in your best interest, your advisor will also recommend the best funds appropriate for your level of risk tolerance. And then suggest you to make the switch in a structured and tax efficient manner.

Sunday, November 4, 2018

Why deal with a SEBI-RIA only?

The investing community in India has witnessed a history of mis-selling of financial products. A recent example of this was the rampant selling of ULIP plans by private insurance companies and their agents prior to 2010. That round of mis-selling ULIPs was encouraged primarily by upfront commissions of more than 60% of first year premiums to the agents. Although this situation was corrected by the IRDA (the insurance regulator) in 2010 by tightening selling rules and introducing disclosures, the damage was already done by then as was discovered by a host of ULIP investors who found that they had been sold nothing but false promises!

SEBI (the capital markets regulator) got into the act in 2013 and introduced the concept of SEBI Registered Investment Advisers as part of the Investment Advisers Regulations 2013. SEBI also warned the general investing public to only deal with SEBI RIAs going forward. The press release in this regard is shown below.

Why deal with a SEBI RIA 
There are several good reasons for engaging the services of a SEBI–RIA for your financial planning and wealth management needs. The primary advantage for the client is that she is dealing with an investment adviser rather than an investment (product) seller. This distinction generates the following benefits:
  • No conflict – Since the SEBI RIA charges fees directly from the client, he is free of conflict with product manufacturers and acts in the best interest of the client. He is also accountable to the client for this reason
  • Certified – SEBI RIAs have to go through a stringent process prior to registration with SEBI. This includes passing the relevant NISM series X-A and X-B exams - which have negative marking - as well as demonstrating proof of adequate qualifications, capital and infrastructure. Moreover SEBI RIAs have to renew their qualifications every three years by clearing the NISM CPE exams in order to retain their SEBI registration. 
  • Customized Advice – SEBI RIAs are required to tailor their advice to match the risk profile of the client. This guideline ensures that they do not dispense a one-size-fit-all solution to all clients.

What to do
It is amply clear that seeking financial advice from a SEBI-RIA is in the best interest of the investor. Astute investors should therefore first verify the credentials of their financial adviser from the SEBI website and thereafter compare their services and fees with other advisers. Investors should select an adviser who is not only qualified and registered but also credible and available. 

Our stock advisory service based on the icTracker software not only picks quality stocks but also designs an efficient portfolio based on the investor’s risk profile. No wonder it is able to deliver consistent outperformance over the years. Check our backtesting results to see how our model portfolio has outperformed every major index handsomely in the past 10 years!

Saturday, September 22, 2018

India Market Summary as of 21 September 2018

Past is a waste paper, present is a newspaper and future is a question paper. Come out of your past, control the present, and secure the future - Warren Buffet

Market status
Nifty has closed at 11,143 yesterday. In fact, it had touched an intraday low of 10,866 before recovering 270 odd points. This is down from a peak of 11,755 on the 28th of Aug 2018. It means that the Nifty has corrected 612 points (or about 5%) in a span of less than four weeks! 

Reason for sharp intraday correction
The sharp intraday correction yesterday was triggered by DSP Mutual Fund selling a large quantum of commercial papers of DHFL at a steep discount, generating fears of liquidity crunch in DHFL. The stock fell more than 55% in intraday trade before recovering a bit and closing the day at a loss of 43% for the day! Its closing price of 353 was last seen 18 months ago in March 2017! The fear of liquidity soon spread to other NBFC and HFC stocks, all of which saw bloodbath yesterday and closed in the red.

This sharp correction has created anxiety among long term investors in the stock market, who are now asking whether they should protect their capital and start selling their holdings. All our Clients were already advised to sit on cash, well in advance, in anticipation of this correction

FII/DII activity
FIIs have been net sellers in the stock markets for six straight months. In the month of September they are choosing to buy on dips, although they have been net sellers for the month. DIIs on the other hand have been net buyers for 18 straight months on the back of strong SIP inflows. However, the volume of DII buying has tapered significantly in past three months suggesting that SIP inflows may also be tapering off.

GDP data
Meanwhile India’s GDP figures for the June quarter came in at 8.2% and this was announced at the end of August. This confirms India’s position as the fastest growing economy in the world among all the big volume economies. Consumption led demand and Infrastructure spending continues to be very strong in India. However oil prices and a weakening rupee have thrown a spanner in the works and inflation could be inching up along with interest rates. This In turn may affect the growth rate going forward.

What to Do
Investing is a long term game. As always, the best investing strategy is to invest in companies with strong earnings growth and healthy order book. Any competitive advantage in the marketplace is an additional bonus for the business. This is where our advisory service based on the icTracker software is able to deliver consistent outperformance. Check our backtesting results to see how our model portfolio has outperformed every major index handsomely over the past 10 years!

Happy Investing!

Abhijit Talukdar
Founder, Attainix Consulting
SEBI Registered Investment Adviser - INA000006703

Sunday, December 31, 2017

2017 - Letter to Clients

2017 has been a good year for Indian long term investors. The Nifty started the year at 8179 and ended it at 10,531, recording an impressive annual gain of 28.8% in the process. Equity remained the preferred asset class for investors this year, partly due to the continuing subdued mood in the real estate and bullion markets. 2017 has also been an impressive year for me and for all our Clients at Attainix Consulting. The average annual return of client portfolios under our advice clocked in at 53.6% this year. This is almost twice as much as the benchmark itself and is admirable by any yardstick. More importantly, all our client advised portfolios beat the benchmark Nifty by a significant margin. This is a matter of immense satisfaction for me, because it implies that our stock picking methodology generated healthy alpha (excess return above and beyond the benchmark) for the benefit of all our Clients, justifying our advisory fees! Further, it endorses our investment thesis that businesses with high degree of knowledge assets will always outperform the competition and continue to find favor with investors. The fact that we are the first and only firm that has quantified this investment thesis into programming logic that enables us to pick stocks free of human bias, only gives us an added edge!.

Which begs the question - what is the basis for our investment thesis anyway? Why do we believe in businesses with high Knowledge assets? And what are Knowledge assets? Why do businesses with high degree of Knowledge assets
have a competitive advantage in the marketplace? We will have to go back in time to answer these questions. Take a look at the graphic alongside. It shows that for the longest time in our history and until the turn of the last century agriculture was the main source of income for a majority of the population. Scale was achieved during this era simply by expanding into additional land. But land is a limited commodity and businesses had to find a way to get more from the land under their control. The invention of the steam engine and electricity enabled this need, ushering in the Industrial era. This era led to the creation of scale enabling businesses that achieved scale simply by replacing human and animal labor with machines. In this era the focus shifted from the production of agricultural produce to industrial products. This era lasted for the next 150 years or so which is when the Information era kicked in, with the invention of the computer. Just as machines in the Industrial era fastened the production of goods, computers in the Information era hastened the processing of Information. Thus in this era the focus shifted from the production of industrial goods to the processing of Information. Those businesses that could process Information quickly, efficiently and continuously were able to convert this information into Knowledge. And Knowledge is Power. This Knowledge gave such businesses a leg up over their rivals. It also gave them pricing power and enhanced their profitability beyond bounds. But it also attracted competitors who tried to replicate this process. Businesses that are able to encapsulate and institutionalize their information processing and knowledge generation process and shield it from their competitors have effectively developed an asset, which we classify as a Knowledge asset. Knowledge assets are intangible in nature – they are formed from a fluid combination of human knowledge and skills, business processes, databases, brands and supplier/customer relationships. Such is their beauty that Knowledge assets are hard to develop, maintain and replicate, but their impact is eminently visible and measurable! 

Having understood the nature of Knowledge assets, the only question left now is how do we discover such assets? That is where our icTracker software comes in – it calculates and reports the Knowledge assets (a.k.a. Intellectual Capital) of leading Indian and US businesses continuously. It provides us the basis for our simple three step stock picking process which, although described on our website, is worth repeating here.

STEP 1 – EVA check: We start by first checking whether the business is generating more money than its cost of capital. This is done by calculating the EVA (Economic Value Added) of the business. Ideally, we want to select businesses that have a positive EVA. The rationale for this check is that if the business is not able to generate at the least even its cost of capital, then it is actually eroding shareholder value. Alternately, if the business is generating more than its cost of capital, it will be in a position to fund its future expansion from internal resources, which will further decrease its cost of capital. Note that, this check will eliminate startup and fledgling businesses by design. It does not mean that such businesses are not good investments. It only means that these businesses have to prove their business model before they can be considered worthy of investing for retail investors.

STEP 2 – Knowledge assets check: This is the asset quality test. Here, we check whether the business is generating profits from traditional assets (such as land, building, machinery, cash) or from Knowledge assets. We look for businesses that have at least 50% of their total assets in the form of Knowledge assets. The rationale for this check is our belief that businesses that are generating profits from traditional assets will come under competitive pressure sooner or later, simply because such assets are not defensible. Anyone with sufficient cash can buy land and machinery. Knowledge assets on the other hand take years to build and develop and once in place, they provide sustainable competitive advantage to the business. In other words, such businesses develop a moat, which is difficult to surmount.

STEP 3 – Affordability check: In the above two steps, we have shortlisted businesses that are generating value through the use of Knowledge assets. As investors, these are highly desirable businesses because in all probability they will continue to generate sustainable profits for years to come. All that remains to do now is to find whether the stock underlying the business is affordable. For that we compare the market value of the stock to the intrinsic value of the business. Those stocks that have a low ratio of market value to intrinsic value are the ones that have not yet been recognized by the stock markets and hence worthy of our attention as investors.

This simple three step stock pricking process has not only proved its mettle during our back-testing but also provided above-benchmark returns to real Clients. Our icAdvisor service uses this exact stock picking process. In addition, when designing Client portfolios using the icAdvisor service we strive to reduce risk for our Clients by the following three actions: 
  • Taking risk profile of the Client into consideration. This ensures that the stocks that we recommend match the risk taking ability of our Client. For instance, a Client who has low risk appetite and interested primarily in capital preservation will benefit from investing in established mature businesses that have a high dividend yield than from investing in emerging smaller sized businesses, which are considerably riskier.
  • Selecting stocks from different sectors. This ensures that we do not put all our eggs in one basket. Rather, we divest the portfolio into multiple sectors, picking no more than one or two stocks from each sector. Sectoral impact on the portfolio, if any, is thus limited to the specific stock.
  • Striving to build a perfectly diversified portfolio. All our Client portfolios are designed at the efficient frontier – it means that the quantum of each stock in the portfolio is such that it has minimum correlation with any other stock in the portfolio. This gives each stock the chance to perform independently of each other in the portfolio.

Despite all the above steps, sometimes one or two stocks in the portfolio fail to perform due to the vagaries of the market. This is the reason why we provide a free rebalance option in our icAdvisor service. Many of our Clients opted for the free rebalance this year and saw the benefit of doing so. Others chose to skip it because of satisfactory performance of their portfolios. Remember, even though the rebalance is free from our side, there is still a cost that you have to incur in terms of brokerage fees, transaction fees and government taxes.

In passing, I want to take this opportunity to thank you for putting your faith in our investment thesis and in our icAdvisor service for generating above average returns for your hard earned money. Your continued trust makes us stay committed to the vision encapsulated in our tagline – ‘Growth through Knowledge’. I believe that we can grow only when you see value in our service and growth in your own portfolios. I am available to address client queries at all times and am approachable via email or whatsapp. I am also open to feedback and suggestions and welcome you to provide the same. I also hope that if you have benefitted from our service, you will spread the word to your own friends, family and colleagues and have them share the benefit as well. 

Finally, let me wish you and your family a very happy and prosperous Happy New Year and hope that the relationship that we have built this year will continue to grow for many years to come!

Abhijit Talukdar
Founder, Attainix Consulting
SEBI Registered Investment Adviser

Wednesday, October 25, 2017

Invest in Stocks as per your risk profile

Investing in the stock markets requires a study of stocks no doubt, but more importantly it requires an understanding of your own self – your expectations and objectives for investing in stock markets in the first place. Stock market investments are inherently risky and therefore the first thing to do is to understand your own attitude towards risk. Some questions that you need to ask yourself in this regard are:

  • Your investment objectives – Capital preservation, Regular Income, Capital Appreciation, or a combination of these.
  • The amount of time you are willing to stay invested in the markets and forget about the invested money
  • Your inclination to learn more about the underlying business, the competition, the economic environment, etc.
  • The frequency with which you tend to follow your stock investments – by the hour, daily, weekly, etc.
  • Your mental make-up in the face of a steep market correction – ranging from sell and get out asap to buy more since stocks are much cheaper now

A professional investment adviser can understand your risk profile using a standard multi-choice questionnaire within minutes. This can range from conservative to balanced to very aggressive. At Attainix Consulting we use a five step risk profile classification and use that to advise Clients about the right stocks for their portfolio. This is not only in the best interest of the Client himself but it is also mandated by SEBI as the standard approach to be followed by all SEBI Registered Investment Advisers. This approach aligns the client’s expectations and investments objectives with his stock portfolio and thus minimizes the chances of future discontent.

Managing the risk of investing in stock markets has many elements, but the first step is to know your own attitude towards risk. As Warren Buffet likes to put it – Risk comes from NOT knowing what you are doing.

Sunday, February 26, 2017

Ideal number of stocks to hold in a Portfolio

Individual Investors who manage their own portfolios often grapple with the question of the ideal number of stocks that they should hold in their portfolio. This question is very relevant since a low number of stocks can significantly increase portfolio risk while a high number of stocks can considerably dilute portfolio returns and also increase transaction costs. This question is particularly relevant to those investors who are prone to buying stocks from ‘stock tips’ that come their way via various channels, and who therefore have to decide at some point of time whether enough is enough.

It is pertinent to note that when determining the number of stocks to be held in the portfolio, investors implicitly deal with two types of risk – systematic and unsystematic risk. Unsystematic risk is the risk associated with a particular company or Industry. It can be reduced to near zero levels by holding a portfolio of well diversified stocks.  Systematic risk on the other hand, is the risk associated with the entire stock market. No amount of diversification in your portfolio can reduce it.

Hence the exercise behind trying to understand the ideal number of stocks to hold in a portfolio is one of striking the right balance between minimizing unsystematic risk and maximizing portfolio returns. While there is no right answer to this question, the factors that will influence the answer are
  • The Portfolio corpus
  • Stock market that you are investing in (US, India, etc.)
  • Your Investment time horizon
  • Your Risk tolerance

In this context, the celebrated economist John Maynard Keynes proposed in 1938 that investors should hold concentrated investment portfolios. He believed that skilled investors can maximize their long-term returns through a deliberate selection of well researched and diversified stocks. This concept has stood the test of time to this day as confirmed by the fact that fund managers of most diversified equity mutual funds hold no more than 30 stocks in their portfolios. While such funds have access to considerable research resources from a variety of sources, individual investors generally lack these resources. Researching quality stocks with the potential for generating above average returns in the long runs takes considerable amount of time and resources.

Hence at Attainix Consulting, we believe that as a thumb rule individual investors should hold no more than 15 stocks in their portfolio at a given time, which is half that held by most equity mutual funds. We also practice this philosophy when advising our Clients for the icAdvisor service, wherein depending on the four factors enumerated above, we recommend between a minimum of 5 and a maximum of 15 well diversified stocks. Even the back-testing of the icTracker software has been performed using a maximum holding of 15 stocks at any point in time and the results published on the website only confirm the superior returns that can be had from a concentrated portfolio, with the minimum of risk!


1.   concentrated-stock-portfolios.html. (n.d.). Retrieved Feb 24, 2017, from

2.   optimalportfoliosize.asp. (2005, July). Retrieved Feb 24, 2017, from