Mutual Funds

Does expense ratio matter?

K. Venkatasubramanian | Updated on March 10, 2018

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The expense ratio usually falls as assets of a fund grow.

Which one of the following two funds should I select: Canara Robeco Equity Diversified and UTI Opportunities? The former has a higher expense ratio (2.25 per cent) compared with UTI opportunities fund (1.86 per cent).

Kindly suggest one of the them based on their performance and expense ratios. — Murali

Both are high-quality funds and have been consistent performers.

Expense ratio is also an important criteria for deciding on the right funds, especially in choosing between two similarly performing funds. The ratio of a fund generally tends to come down as the asset size grows.

The exception is Quantum Long-Term Equity, a fund with a small corpus size, which has an expense ratio of just 1.25 per cent and a consistent track record.

Coming to your question, both the funds have delivered returns that are within a percentage point or two of each other. But UTI Opportunities holds a slight edge with a better performance and a lower expense ratio.

This fund has delivered 13.5 per cent annual returns over a three-year period, while Canara Robeco Equity Diversified grown by 12.9 per cent over a similar time frame. On a five-year basis, UTI Opportunities' record is even better.

Based on your criteria, you must choose UTI Opportunities. But do not always use expense ratio as a criteria, especially when funds with compact asset sizes outperform by huge margins.

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I have been investing Rs 1,500 a month in each of the following funds in the form of systematic investment plans from November 2009: Templeton India Equity Income, HDFC Equity, Reliance Diversified Power Sector, Reliance Infrastructure and SBI-Magnum Sector Funds Umbrella Contra.

I have a five-year investment horizon. Please let me know if my portfolio would provide good returns and suggest changes, if needed. — Himanshu Bansal

You have been investing for over two-and-a-half years now. It would have served your purpose better if you had rebalanced your portfolio a little early, as many funds that you hold lost 20-25 per cent in 2011 and are yet to revive significantly.

You have stated that you have a five-year horizon. We assume the horizon begins from November 2009.

This means you will need the money sometime around November 2014. It would be difficult to derive significant returns within this short time frame.

But don't despair. You must try and increase your investment horizon to a seven to 10 year time frame and reconstruct your portfolio.

The other important aspect is that you have spread Rs 7,500 across too many funds. Ideally, you must have restricted yourself to two or three funds. There is also too much of concentration on sector and theme funds in your portfolio.

Do not invest in sector funds unless you can take decisive calls on entry and exit, with some conviction on the underlying theme. Coming to your portfolio, invest Rs 3,000 in HDFC Equity.

Exit Reliance Diversified Power Sector and Reliance Infrastructure as both the funds have underperformed their categories as well as standard indices over the past few years.

Also, infrastructure as a theme and the power sector are yet to see any significant revival from funding and execution challenges. Hence, it is safe to exit these schemes.

Though Templeton India Equity Income has a long track record, it is an international fund and may not deliver as high as Indian equities.

It is better as a diversifier. You can consider switching to Franklin India Bluechip instead, a large-cap fund with a sound track record, and park Rs 2,500 there.

You can also exit Magnum Contra, as it has lagged its category over a three- and five-year time frame. You can either switch to IDFC Premier Equity, if you can stomach some volatility inherent to mid-cap funds, or move to UTI Opportunities, a less-risky multi-cap bet.

Published on June 02, 2012

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