Do you know your fund’s TER?

Like a growing number of Indian investors, you most likely invest in Mutual Funds on a regular basis. You are also perhaps aware that Mutual Funds charge a certain percentage of their Assets under Management (AUM) for managing the fund. This expense is known as the Total Expense Ratio (TER) and it is a number regulated by SEBI. The maximum TER that funds can charge as management fees depends on the size and type of the fund, as shown below:

AUM slab (Rs cr)	Equity oriented schemes – max TER%	Debt oriented schemes – max TER%
0-500	2.25	2.00
500-750	2.00	1.75
750-2000	1.75	1.50
2000-5000	1.60	1.35
5000-10000	1.50	1.25
10000-15000	1.45	1.20
15000-20000	1.40	1.15
20000-25000	1.35	1.10
25000-30000	1.30	1.05
30000-35000	1.25	1.00
35000-40000	1.20	0.95
40000-45000	1.15	0.90
45000-50000	1.10	0.85
More than 50000	1.05	0.80

As of end of Aug 2019, there were 269 active equity oriented mutual fund schemes in India, with AUMs ranging from a high of 25,069cr to a low of just 0.64cr (source: www.amfiindia.com). Since fund size determines the maximum TER that can be levied by the AMC, it is important for investors to know the fund size before short-listing it. At the top of the scale of 2.25%, every Rs 1000 invested by investors can lead to a fee income of Rs 22.50 for the AMC. This is an annually recurring fee which will be deducted every year - in fact it is deducted proportionally from the NAV every day. What this also means is that if the fund returns 15% per annum before fees, the investor will only get a return of 12.75% after fees. In fact, since management fees are deducted from the NAV on a daily basis, investors will actually get much less than 12.75% on an annualized basis due to the compounding effect of the daily fees. Hence everything else being equal, a fund with a lower TER is always desirable.

A lower TER is even more desirable for debt funds whose expected annual returns are much less than equity funds. Note that as per SEBI guidelines, the maximum TER for a debt oriented fund is only 25 basis points lower than equity oriented funds in the same slab, although the returns for a debt fund can be less than half that of an equity fund over a longer duration. This means that a lower TER is critical during debt fund short-listing, since a higher TER can eat away a significant portion of the absolute returns of the fund.

What to Do

One way to get a lower TER is to always invest in mutual funds with the Direct plan option. This one action alone can reduce the TER by more than 50% compared to the Regular plan of the same fund. Consider the following table that shows the average TER for the three categories of funds for Regular and Direct plans (source: www.valueresearchonline.com)

Fund Category	Regular plan average TER	Direct plan average TER	Savings in Direct plan
Equity	2.02%	1.22%	39.6%
Hybrid	1.96%	0.98%	50.0%
Debt	0.9%	0.42%	53.3%

Since Direct plans offer savings of more than 50% over Regular plans, it is pretty obvious that every investor should opt for them by default. The question then is how to shortlist Direct funds without the help of a Mutual Fund Distributor (MFD) since they will only offer you funds with the Regular plan. You have two choices here – the first choice is to learn to do it yourself. Apart from the pleasure of saving money you will also have the satisfaction of gaining some investing knowledge in the process. If this option is not feasible for you for any reason, then the next best option for you is to hire the services of a SEBI Registered Investment Adviser (RIA) who will charge you a part of your savings for providing his/her services. In this case you will save a little less money but will have the benefit of professional selection of funds as per your risk profile and goals as well as the facility of reaching out to an investment professional any time during the service period. Both options will save you money and have their own benefits – the choice really is yours. An informed investor is always a wiser investor!

Nifty drops below 11000, what to do now?

Thank God, July has ended. We have just gone through the worst July in the Indian stocks markets in the past 17 years! This chart (courtesy Mint) conveys the extent of the carnage on Dalal Street in July.

The selling in the month of July was led primarily by Foreign Institutional Investors who were spooked by the budget proposal to increase the Income tax surcharge for the super rich. This was compounded by sluggish earnings for the June quarter suggesting a serious slowdown in the Indian economy. Notwithstanding the Indian Government’s target to achieve $5tn economy by 2024 there were very few investors who were willing to bet on the Indian stock markets in July. The simmering NBFC crisis and accusations of tax terrorism only worsened the situation. In short, we have moved from a situation of joy and ecstasy in May 2019 after the Modi victory to that of gloom and doom in July – in just two short months.

As an observer of the stock markets I have noticed a more disturbing trend in the past 12 to 18 months – specifically, the Nifty is no longer giving a true picture of the performance of the broader market. In other words, the broader market is significantly underperforming the Nifty over the past 12 to 18 months. In order to confirm this hunch I used the icTracker database and computed the returns of each stock over the past 12 months (including dividends, bonus, etc). I then grouped the returns in bands of 10% ranges and counted the numbers of stocks in each range. I did this for two sets – the Nifty and for all the stocks in the database. I then calculated the count as a percentage of the overall stocks in each set and plotted the results as line charts as shown in the chart below.

Here are my observations of this chart

• The line chart for the ‘Nifty’ is significantly shifted to the right of the line chart for ‘All’ stocks. This shift gives a visual picture of how much the Nifty stocks have outperformed the broader market
• I have put colored areas in the graph to make my point more clearly
• Green – Non Nifty Stocks that have outperformed the Nifty
• Yellow – Nifty stocks that have outperformed the broader market
• Red – Non Nifty stocks that have significantly underperformed the Nifty
• We can see that the size of the green area is significantly less than the combined Yellow and Red areas. This shows how much the Nifty has become disconnected with the broader market in the past 12 months alone.
• Consequent to my study above, I can safely conclude that in the past 12 months investors would find greater underperformance of their stock and Mutual Fund portfolios when compared to the Nifty as a benchmark

What to Do?
Steep market corrections instill a sense of fear no doubt, but also create an opportunity for investing more at lower levels. The right thing to do in such difficult times is to stick to the process – which in simple words means continue to invest as per your own risk profile. While doing this do keep in mind that the Nifty is no longer an indicator of the broader market. In any case the chart above shows that nearly 60% of the Nifty stocks gave negative returns in the past one year. Talk to your investment adviser so that he/she can choose fundamentally good stocks for your portfolio, whether from the Nifty or from outside the Nifty. If you can invest more at this time, you should. If not, just sit tight.