Sunday, June 14, 2009

The Hidden Costs of Mutual Funds

A lot of people invest in mutual funds because they believe that these mutual funds deliver a better return than they could hope to achieve in their lifetimes. Couple this with the glitzy advertising that mutual funds employ that it is difficult to avoid parting with at least some money to the friendly neighborhood financial advisor.

Nonetheless, the fact remains that past performance is not a measure for future performance. Mutual funds are linked to the markets and markets can move up, down and sideways for years.

The biggest problem of investing in mutual funds is not so much average or poor performance but the fact that most funds perform poorly is because the fund manager and the asset management company take large slices of the profit pie even before it reaches your table.

Costs are the biggest problem with mutual funds and responsible for most of the sub-par performance of the funds. What is worse is that the fund industry go out of their way to hide costs by using complex financial structures and using complicated terms. Most investors lack understanding of these and hence do not question.

Fees can be broken down into two categories:

1. Ongoing yearly fees to keep you invested in the fund.

2. Transaction fees paid when you buy or sell shares in a fund (loads).

The Expense Ratio

Cost of hiring fund managers: Usually 0.5 percent to 1 percent of the assets under management. This may appear small but note that this is the value of the assets and not a percentage of profits. Thus this sum gets deducted before the profits are calculated. Sometimes this could work up to 40 percent of the profits made by this fund manager.

Administrative Costs

Costs of postage, accounting, customer service, rents, staff, etc.

Advertising and Promotions

Brokerage commissions paid when purchasing shares and toward advertising and promoting the fund.

On the whole, expense ratios range from as low as 0.2% (usually for index funds) to as high as 2%. The average equity mutual fund charges around 1.3%-1.5%.

Loads or Distribution Costs

There are entry loads and exit loads. Loads are costs paid to ensure the funds are available at every nook and corner. They are also called distribution costs. These are paid to the mutual fund agents. The extra kickback you receive from your mutual fund agent is a portion of the load he receives.

Loads comprise entry and exit loads. Entry loads are when you pay a fee to enter a mutual fund. Usually 2-5 percent of the investment. So if you pay Rs 1,000 for the investment in to the mutual fund, you will get just Rs 950 worth of units.

Exit loads are charged if you exit the fund before a certain time period. For example, some funds will charge an exit load if you disinvest before one year while others will lock you in for 3 or 5 years. As the number of years increase the exit load is expected to reduce and in the last year of the lock-in, it becomes zero.

The key to good mutual fund investing is to purchase units of those funds which do not charge any kind of loads.

Tuesday, May 26, 2009

Garbagemen Beat FMs in Predicting Economy

In December of 1994, the economists sent a questionnaire to four chairmen of multinational companies, former finance ministers from four countries, four Oxford University students, and four garbagemen. They were asked to predict average economic prospects including world economic growth, inflation, the price of oil, and the pound’s exchange rate against the dollar in the ten years following 1994. The economists said the garbagemen and company bosses tied for first with the predictions. The finance ministers came in last.

Extracted from the book The Options Course by George Fontanills.

Saturday, March 14, 2009

Real Estate Prices Slump Toward 2003 Levels

Remember the time when an upmarket property in Malabar Hill Mumbai cost Rs 12,000-17,000 per sq ft. The same situation is likely to come back within a few months according to real estate agents in Mumbai. Prices here had touched between Rs 25,000 to Rs 45,000 per square feet.

New Delhi too is seeing a clear reversal in times. Builders who purchased properties in early 2008 are now wriggling out of deals. In early 2008, a builder had negotiated a Rs 18-crore deal for a 2,925 sq ft house in New Delhi’s upscale Defence Colony area. His objective was to demolish the house sitting on the land and develop apartments, hoping for a return of about 30 percent. However, today he has opted out of the deal losing even the Rs 50 lakh paid he had paid as token money. The same property is now being valued at Rs 9-10 crore.

Developers are dropping prices but the buyers are simply not coming. It is likely that once the panic button is hit, prices could touch rock bottom within months. There are no financiers in the market, and in Delhi, volumes are down 95 percent from peak. New projects launched are 40 percent cheaper than before. NCR regions are also hit. A 11,250 sq ft home in Golf Links, which was purchased for Rs 70 crore, is now available for Rs 50 crore, but there are few takers.

Mumbai's troubled times continue. Sometime ago a deal was made in Usha Kiran Apartments, on Altamount Road, by an executive of a financial broker. Within days of almost finalizing the deal, the executive backed out. Ten months ago, actor Vinod Khanna offered to pay Rs 1.25 lakh per sq ft for a 2,500 sq ft apartment for the ultra-luxury apartments, El Palazzo, located in the Hanging Gardens area of Malabar Hill. Subsequently Khanna backed out, but it was a wise decision.

Current prices in Il Palazzo are around Rs 70,000 to Rs 75,000 per sq ft. Near here, in Pedder Road, rates are around Rs 45,000 per sq ft. A few kilometers away, in Mumbai's CBD, Nariman Point, a London-based Indian national acquired a 3,475 sq ft property at NCPA Apartments, at Rs 97,842 per sq ft, nearly six months ago, but rates there are almost half that now.

In the central Mumbai’s Worli and Lower Parel areas, rates are down to Rs 12,000-18,000 per sq ft, while in Bandra they have fallen by more than a fifth to Rs 15,000-25,000.

Where price drops have been of the order of 50 percent, buyers appear to be showing interest. Orbit Corporation is now asking Rs 16,000 per sq ft for its new project in Lower Parel down from Rs 35,000 per sq ft.

In India’s technology capital Bangalore, prices have fallen by up to 25 percent in some area, says a Morgan Stanley report, and DLF, India’s biggest real estate company, cut rates by about 30 percent at its upcoming project.

Brigade Group's The Gateway project, one of the oldest localities in town, is quoting at Rs 5,090 per sq ft against Rs 5,790 per sq ft last year. Second sales are going at Rs 4,700-Rs 4,800 per square ft.

Kolkata too is cooling down on the real estate front. Prices are off their mid-2008 peaks. In areas such as Ballygunge Circular Road, Sunny Park and Queens Park rates, which were Rs 8,500-10,000 per sq ft in January 2008 jumped to Rs 13,000-14,000 in June-July before dropping to Rs 9,000-11,000. Residential properties sold at Rs 12,000-15,000 per sq ft last year, are averaging Rs 9,000-10,000 per sq ft now.

Read the full story here

Thursday, January 08, 2009

The Simple Explanation to What Happened at Satyam

Everyone is asking the question: What happened to Satyam's Rs 5,400 crore cash that was on the books. Amid all the hype, here's the simple story.

Ramlinga Raju found a way to give Rs 5,400 crore to his son's real estate companies Maytas Infrastructure and Maytas Properties. This money had already been siphoned out before the declaration that Satyam was buying out the two Maytas companies.

However, the shareholder revolt that followed forced Ramlinga Raju to cancel the buyouts. But the money had already been transferred out.

The other simple story: Satyam had been fudging figures for years. There was no substantial cash in any case. The only way to show this cash as spent, was to acquire Maytas and show is as an asset purchased for the cash.

This way cash from reserves would be shown as investments or cash paid for aquisition.

Either way, Ramlinga Raju screwed up.




Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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