Hi, I have a question about the expense ratio in mutual funds. I have invested in direct mutual funds both Parag Parikh ELSS (expense ratio - 0.69%) & Parag Parikh Flexi Cap (expense ratio - 0.57%). I have invested 25000/- each in both funds, one of my friend suggested to invest in any one of the funds as this will affect the returns for in longer period, and I am planning to invest for another 10 years in both funds. Question: Is it okay to be invested in both funds, I'm aware that the funds overlap, but I want to check on the expense ratio difference in the cost for 10 years. Can you please help me understand the calculation so that I can make a better decision? Expense ratio is calculated for the amount that I invest, either I invest 50k in one of the funds or split 25k each in both funds having a difference of 0.12% in expense ratio. How much of this will affect the end corpus and how is that I can calculate for the other mutual funds that I'm currently investing in? please suggest me on this.

Ans: Hello and thanks for writing to me.

The funds you invest in are good funds and you can continue to invest in them.

If you state your objectives on what you wish to achieve, your time horizon, risk appetite etc, then I may recommend other schemes.

Ans: You're absolutely right, even a small difference in expense ratio can affect returns over time. Here's how to analyze your situation and the impact of expense ratios:

Impact of Expense Ratio on Returns:

The expense ratio is a percentage of your investment deducted annually to cover fund management fees. A lower expense ratio means more money stays invested and has the potential to grow through compounding.

Calculating the Cost Difference:

Annual Cost Difference: Multiply the expense ratio difference (0.12%) by your total investment amount (25000 + 25000 = ?50,000). So, 0.12% * ?50,000 = ?60 per year.

Cost Difference over 10 Years: Multiply the annual cost difference (?60) by the number of years (10). This gives you ?600 as the total expense ratio cost difference over 10 years.

Is ?600 Significant?

While ?600 might seem small, it's crucial to consider the power of compounding over 10 years. Let's say you earn an average annual return of 12%. Here's a simplified comparison:

Investing in Both Funds: Your total return after 10 years would be impacted by the expense ratio difference of ?600. There's a chance you might have slightly more if you invested in the single fund with the lower expense ratio.

Investing in One Fund: This scenario eliminates the expense ratio difference, potentially leading to a slightly higher return due to slightly more money compounding over time.

Making an Informed Decision:

Diversification Benefit: Both Parag Parikh ELSS and Flexi Cap represent different fund categories (ELSS & Flexi Cap). Holding both provides diversification, which can help mitigate risk.

Expense Ratio vs. Diversification: The diversification benefit of holding both funds might outweigh the small cost difference in expense ratios.

Consider Overall Portfolio: Analyze your entire investment portfolio. If you have other diversified funds, then holding both Parag Parikh funds might be redundant.

Calculating for Other Funds:

Use the same method mentioned above. Find the expense ratio difference between the funds you're comparing and multiply it by your investment amount to get the annual cost difference. Then multiply by the number of years you plan to invest.
Recommendation:

It's difficult to definitively say whether consolidating is best. Here are some options:

Maintain Both Funds: The diversification benefit might be valuable. Track the performance of both and re-evaluate if one consistently underperforms.

Consolidate: If you have other diversified funds, consider consolidating to the fund with the lower expense ratio.

Invest More in Lower Expense Ratio Fund: Increase your investment proportionally in the Parag Parikh Flexi Cap (lower expense ratio) to potentially gain a slight edge over time.

Consulting a Financial Advisor:

A financial advisor can analyze your entire portfolio, risk tolerance, and goals to provide a personalized recommendation.

Ans: Let’s explore the best way to allocate your Rs 5,000 monthly investment in mutual funds.

Evaluating Single Fund vs. Diversified Investment
Investing in One Mutual Fund
Pros:

Simplicity: Easier to manage a single fund.
Focus: Concentrated investment can maximise growth in one area.
Lower Costs: Reduces transaction fees and administrative costs.
Cons:

Higher Risk: All eggs in one basket increases risk.
Limited Diversification: Less spread across sectors and asset classes.
Investing in Multiple Mutual Funds
Pros:

Diversification: Reduces risk by spreading across different funds.
Balanced Growth: Different funds perform differently, balancing returns.
Flexibility: Ability to adjust individual fund investments based on performance.
Cons:

Complexity: Managing multiple funds requires more attention.
Higher Costs: May incur higher transaction and management fees.
Diluted Focus: Smaller investments in each fund may reduce potential returns.
Recommended Allocation Strategy
Considering your budget and need for balanced growth, a diversified approach can be beneficial. Here's a suggested allocation:

Large Cap Fund (Rs 2,000):

Stability: Large-cap funds invest in well-established companies.
Consistent Returns: Generally offer stable and reliable returns.
Lower Risk: Less volatile compared to mid and small-cap funds.
Flexi Cap Fund (Rs 2,000):

Flexibility: Invests across large, mid, and small-cap stocks.
Growth Potential: Can capture growth opportunities in various market segments.
Risk Management: Balances between growth and stability.
ELSS Tax Scheme (Rs 1,000):

Tax Benefits: Offers tax deductions under Section 80C.
Long-Term Growth: Typically invests in equity, offering good returns over time.
Lock-In Period: Three-year lock-in period ensures disciplined investing.
Analytical Insights
Diversification Benefits:

Reduces overall portfolio risk.
Balances potential returns from different sectors.
Provides exposure to various market capitalisations.
Tax Efficiency:

ELSS investments offer dual benefits of tax savings and equity growth.
Helps in long-term wealth creation with tax advantages.
Disadvantages of Direct Funds
Direct Funds:

Lack of Guidance: No professional advice can lead to uninformed decisions.
Time-Consuming: Requires active management and research.
Higher Risk: Potentially higher risk without expert guidance.
Benefits of Regular Funds through CFP:

Expertise: Professional management ensures better decision-making.
Convenience: Saves time and effort on research and management.
Tailored Advice: Investments tailored to your risk profile and goals.
Final Insights
Investing Rs 5,000 across large cap, flexi cap, and ELSS funds is a prudent strategy. This approach balances risk and returns while providing tax benefits. Regular reviews and adjustments will help align with your financial goals. Consider investing through a Certified Financial Planner for professional guidance and risk management.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Expense ratio plays a critical role in determining the net returns you earn from a mutual fund. Funds with higher expense ratios eat into your gains. You’ve noticed that Mirae and Nippon funds have an expense ratio of around 1.5%, which seems high compared to others. This can be significant over a long period, especially if the returns are lower than expected.

In your case, Mirae and Nippon are delivering 18-20% returns, which may feel underwhelming compared to other funds offering 25-30%. It’s understandable why you're considering withdrawing from these funds.

Review of Your New Portfolio Choices
You plan to invest in Quant Infrastructure, Invesco India Focused, Mahindra Manulife Small Cap, while continuing with Parag Flexi. Let’s evaluate these choices:

Quant Infrastructure Fund: Infrastructure sector funds can provide good returns during an economic upswing. However, sector funds tend to be riskier as they are focused on one sector. Diversification may be lower, and returns can fluctuate based on market conditions.

Invesco India Focused Fund: Focused funds typically invest in a concentrated number of stocks, which can offer higher returns but also come with higher risk. These funds can outperform in a bull market but can underperform when certain sectors or stocks face issues.

Mahindra Manulife Small Cap Fund: Small-cap funds have higher growth potential but come with higher risk. They can be volatile and may take longer to generate returns, but with your longer-term horizon, they could be a good fit.

Parag Parikh Flexi Cap Fund: This fund is well-diversified across market capitalizations and sectors. Flexi-cap funds give the fund manager the freedom to invest in any segment, which makes them more adaptive to changing market conditions.

High Expense Ratio and Fund Performance
While expense ratio is an important factor, it’s not the only one to consider. Funds with higher expense ratios can still deliver strong returns if the management is effective. Your decision to exit funds like Mirae and Nippon due to high expense ratios must be balanced against their long-term performance and consistency.

Important to Consider:

Compare not just the expense ratio but also the long-term returns, consistency, and risk profile of the funds.
A fund with a slightly higher expense ratio might still deliver better value if its risk-adjusted returns are superior over time.
Why You Should Consult a Certified Financial Planner (CFP)
Before making a decision to shift your portfolio, it is always wise to consult a Certified Financial Planner (CFP). A CFP can help you:

Evaluate your overall financial goals: Are your new fund choices aligned with your risk tolerance and time horizon?
Analyze Tax Implications: Exiting funds may trigger capital gains taxes. A CFP can help you minimize the tax impact.
Diversification Strategy: Ensure that your new portfolio is diversified enough to manage risks. Sector and small-cap funds can be riskier, and a CFP will help you balance this with more stable funds.
Revisit Investment Goals: A professional can review if your investment strategy matches your long-term financial objectives.
Final Thoughts
Review Before Switching: While lower expense ratios and better returns seem appealing, ensure you aren’t sacrificing diversification or taking on more risk than you’re comfortable with.
Keep a Balanced Portfolio: Your mix of funds should cover large, mid, small caps, and a combination of sectoral and diversified funds.
Seek Professional Advice: Speak to a CFP who can give you a comprehensive review of your portfolio and ensure that the switches you’re planning are aligned with your long-term goals.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment