Sir,when I see my Mutual Funds portfolio metrics in Gulaq app, some of the funds Net expense ratio showing different than the Expense ratio listed officially by those Funds, for example: Edelweiss Gold ETF fund Regular Plan expense ratio is 0.45% but in Gulaq app the net Expense ratio for same fund is showing 0.65%, for Axis Corporate Bond fund Direct Plan its showing 0.27% whereas in Funds official data/Factsheet its 0.34%, why is this difference? Does the Net Expense Ratio & Expense Ratio mean different? For same fund its different can you please help me understand.

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: It's great to see you taking an interest in understanding the impact of expense ratios on your mutual fund investments. Making informed decisions is key to financial success.

Investing in multiple funds can provide diversification, but it's essential to consider factors like expense ratios. Even small differences can add up over time, affecting your overall returns.

Opting for funds with lower expense ratios can help maximize your returns in the long run. However, it's crucial to weigh this against the benefits of diversification and the fund's performance track record.

If you're invested in overlapping funds with similar investment objectives, consolidating into one fund may streamline your portfolio and reduce overall costs.

As a Certified Financial Planner, I recommend evaluating the expense ratio difference over the investment horizon to gauge its impact on your end corpus.

While the difference may seem insignificant initially, compounding can magnify its effect over time, potentially resulting in a substantial variance in your final returns.

To calculate the impact, you can use online calculators or consult a financial professional who can provide personalized projections based on your investment amount and time horizon.

Remember, investment decisions should align with your financial goals and risk tolerance. Consider seeking advice from a Certified Financial Planner for tailored recommendations based on your individual circumstances.

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