Mutual Fund Investing: Risk vs. Reward vs. Volatility

Nearly two years ago, one of my personal finance influencers, Ramesh Mangal, cautioned me that there is no clear-cut relationship between risk and reward. Although he had pointed me towards proof of the same, I did not pay much heed to it at that time.

Now after being reasonably comfortable with commonly used risk-return metrics like alpha, beta, Sharpe ratio, Sortino ratio etc. I am beginning to understand what he meant. read more

Young Earners: Do not invest Rs. 1.5 Lakh in PPF!

In the previous post in the ‘young earner’ series, I had listed down a set of personal finance essentials. Two points appear to have caught the eye of many readers.

  1. Do not open a PPF account
  2. Do not start a SIP in an ELSS fund

In this post I would like to expound on the first point. But first, a quick look at the second.

Do not start a SIP in an ELSS fund because each instalment will be lock-in for 3 years. Instead, open an account with an AMC, and invest every few months, on market dips, if possible. read more

Mutual Fund Returns: Distant Past vs. Recent Past

Do past returns matter? Does it make any sense to choose a mutual fund that has performed consistently in the past? After all, there is no guarantee that it would continue to perform well in future.

Let us try out a simple exercise.

  • Download returns data from Value Research Online of all equity funds currently open for subscription, except direct funds.
  • Plot the 10-year returns (distant past) of all funds against their 3/5/1-year (recent past) returns and visually observe correlations.

The idea is to determine the extent of correlation between a funds 10-year trailing return with its 5/3/1-year trailing return.

If there is a strong correlation, then choosing a fund with impressive ‘history’ makes perfect sense. If there is no correlation, there is no point relying on past performance. read more

Budget 2014: Revised Dividend Distribution Tax Calculator

The dividend distribution tax (DDT) to be paid by the AMCs whenever a dividend is announced on non-equity mutual funds is 28.325% (25% + 10% surcharge + 3% education cess).

According to the announcement made on budget day, with effective from October 1st 2014, the way in which DDT is calculated has been revised.

In this post, we will try to understand the ‘old’ and ‘new’ methods of calculating DDT. read more

Budget 2014: Short-term goal planning is now easy!

The tax arbitrage between debt mutual funds and fixed deposits/recurring deposits does not exist for less than 3 years.  This announcement, made by finance minister yesterday, has left many investors and mutual fund distributors worried.

For those who believe that investing has to be done with a future expenditure in mind, this is welcome news. Or at least it ought to be.

Planning short-term goals (less than 3 years away) has now been made easy! I would say even trivial. read more