Yield vs. Return

An investor reached out to me with questions related to a certain floating rate fund.  The fund had reported its May-end net portfolio yield (i.e. after expenses) to be ~6.5% p.a..  How was it then, he asked me, that over the month of June, it had shown an annualized return of ~23% p.a.?  If it was, as he suspected, somewhat linked to the last round of rate cuts by RBI, then why was it that other funds that had relatively higher yields as well as higher duration, hadn’t gained as much as this fund?

His suspicion was not without merit.  Such a difference in return over yield is usually seen at times when RBI cuts interest rates.  It’s just that, this time around, bond yields have been taking their time to adjust to the cuts.  While RBI cut rates in March and May, some of the expected fall in yields played out only over June. 

However, there are a couple of things that the investor overlooked.

Firstly, the fall in yields in June wasn’t uniformly across the yield curve, or issuers, and there were some striking differences in returns across funds and fund categories.  For instance, the category that gave the best return was that of corporate bond funds yet the best performing fund across categories was a credit risk fund.  While the categories of short and medium duration funds did better than ultra short and low duration funds, gilt funds, despite their much longer duration, gave lesser return than all these categories.  In a nutshell, it boiled down to the individual securities that a fund was holding. 

In that light, if I look at the May-end portfolio of the aforementioned floating rating fund, some part of its extraordinary gains in June would have been driven by a ~100 bps fall in yields of two AAA bonds, with 3-4 years left to their maturity, and which made up ~10% of the portfolio.  In addition, some gains would have resulted from a 30 to 55 bps fall in the yields of perpetual bonds that the scheme was holding, and which made up ~18% of the portfolio.  In the aftermath of what happened with Yes Bank, across-the-board, yields of perpetual bonds shot up and have remained high ever since.  Only in June did those yields show signs of softening.

I must point out that all that I said just now assumes that those securities continue to be held in the fund’s portfolio.  We will know for sure, once the June-end portfolio is disclosed.

Secondly, at a more conceptual level, while the portfolio yield of a debt fund is the single most important indicator that an investor should examine and track, it has its own limitations.  Yes, it can give clues as to the level of credit risk in a fund, as well as roughly indicate what might be the immediate return that one could expect.  However, yields change daily whereas fund houses disclose the yields only at the end of each month.  Thus, in a period of sharp changes in yields, the last month-end yield will be of limited use.

In addition, if a fund holds illiquid or thinly traded securities, then the fund’s yield may not be a true measure of how the market may value its portfolio.  Selling those securities can well bring about gains or losses to their portfolio values.

To illustrate this point, I’d like to take the example of a fund whose reported net yield as of May-end was ~12% p.a. but which ended up giving a negative return over June, and not because of any markdown or default.

This scheme held a certain security that alone made up almost a third of the portfolio, and which was valued at an estimated yield of ~16% p.a..  For some reason, the fund manager chose to sell some of that security in June.  As it happens, the sale was made at a yield of 28% p.a..  In other words, the fund got a lot less money than what the security had been valued at.  That led to the NAV falling by ~1.5% that day, and that alone was enough to wipe out whatever gains the reported yield would have brought about over the entire month.

To be fair, this may be an extreme example.  Still, it should help drive home the perils of blindly relying on a  fund’s portfolio yield.

Observations On The Essel Mess

Guest post by Norman Evan

Remember the 30 September deadline for some FMPs and other debt funds to have got back the money they’d invested in Essel group companies?  That date has come and gone, and things haven’t played out the way some mutual fund managers thought, or led investors to believe.

If you don’t remember or haven’t been following the story, it involved limited purpose, private companies linked to the Zee promoters.  Sprit Textiles, renamed as Sprit Infrapower and Multiventures.  Edisons Utility Works, renamed as Edisons Infrapower and Multiventures.  Continental Drug Company, renamed as Konti Infrapower and Multiventures.  There are more, but you get the idea.  If you lifted their corporate masks (or veils, if you like), I guess all these companies would look pretty much the same.

These companies had borrowed money from various mutual funds.  The borrowing was on largely similar terms. Most of the NCDs that were created, ticked all the boxes that would unnerve a risk-averse bond investor.  Zero coupon bond.  Check.  Backed by shares.  Check.  Rating by Brickworks.  Check.

As we’ve seen time and again, the mutual fund managers were either suckers for a good yield or had their own interests or agenda.  These NCDs had no place in mutual fund portfolios.  Certainly not in FMP portfolios where a lot of them landed.

Then, some months ago, there were the first signs of dark clouds looming.  It looked like the Zee promoters wouldn’t be able to pay back some of the money on time.  But if everyone went about selling the shares which backed the NCDs, they’d  get much less than what they hoped for.  So they all sat down and hatched up a plan.  They decided to give the Zee promoters time till 30 September to come up with the money.

So what happened?

One, not all companies paid up.  Why?  I guess only the Zee promoters or their associates can tell us that.  Konti paid back in full.  Edisons and Sprit paid back some of the money but there’s a fair bit still left to be paid back.

Two, the repayment has been pretty arbitrary. Kotak MF got paid back all that they were owed.  But Birla MF and HDFC MF have a lot less to smile about.  And while Kotak MF might brag about how their decision to give time to the Zee promoters has been vindicated, I’d say they got lucky.  Unless they arm twisted their way to get the payment. 

Talking about arbitrary repayments, this is becoming quite the thing.  Back in June, FT got fast track payments for their investments with the DHFL promoters.  Other mutual fund managers whose DHFL investments were more investment-worthy and repayment-worthy than that of FT, have been left holding a lemon. 

Three, there’s the mystery of dual ratings.  Brickworks, in its infinite wisdom, has downgraded some Sprit and Edisons NCDs to a D rating while it has downgraded other NCDs from the same companies to BB-.  Why?  It would seem that wherever payment was due, but didn’t happen, they did a downgrade to D.  But where payment was not yet due, they decided that those NCDs weren’t yet ripe for a complete downgrade.  Is this what happened with IL&FS or DHFL? No.  So why did this happen in this instance?  Read this rating rationale for the Sprit downgrade and see if you can figure that out.  I can’t.

To continue with Sprit as an example, it had NCDs outstanding to the extent of 1064 cr or so.  Of this, 211 cr was due as on September end.  The company paid back 100 cr- fine.  The 111 cr that it didn’t pay back was downgraded to D.  But the 853 cr which isn’t yet due, was only downgraded to BB-.  And that’s what makes my head explode.  Sort of.  These guys couldn’t pay back 111 cr but the rating agency seems more optimistic that they’ll pay back the 853 cr.  It just takes my breath away.

Could it be- could it just be- that this may have something to do with the impact it has on scheme NAVs?  A D downgrade would mean writing off 100% of the investment value while a BB- means writing off just 25% of the value.  You have to admit- AMCs do have a rather cozy relationship with rating agencies.

When Scheme Differences Are Erased

SEBI’s decision to create clearly defined scheme categories (and to limit fund houses to one scheme per category) was a big step towards empowering investors to make better scheme choices.  It’s been a year since that came into effect and for the most part, it’s been a success.  Unfortunately, some funds houses have found (or are finding) ways to wipe out the differences between schemes across different categories.  While there is a need for SEBI to step in, investors also need to be vigilant, else we could end up holding a scheme that is quite different from what we expected it to be. 

In this post, I want to share a few examples of the variety of ways in which fund houses have attempted to blur the differences between schemes in different categories.  I have presented these in the form of a short quiz.  There is a link to the answers at the end of the post.

Q1: Deceptive Descriptions

Given below are the descriptions of two open-end equity funds managed by a certain fund house.  These descriptions have been taken from the fund house website.  One of the schemes is classified as a ‘Mid Cap’ fund.  Based on these descriptions, can you identify which one of these is the real ‘Mid Cap’ fund?

Fund A:

An open ended equity scheme predominately investing in mid cap stocks

Fund B:

…is primarily a Mid-cap fund which gives investors the opportunity to participate in the growth story of today's relatively medium sized but emerging companies which have the potential to be well-established tomorrow.

Q2: Deceptive Advertising

Given below are masked banner ads for two equity schemes managed by a single fund house.  One of these schemes is classified as a ‘Focused’ fund, while the other is classified as a ‘Multi Cap’ fund.  If you had been able to read the detailed descriptions (which are in smaller print), you might have been able to know which ad is for which scheme.  But since these are website ads, which many will have seen (or will see) on mobile devices, the headlines become all the more important.  Based on the headlines, can you identify which of these is the actual ‘Focused’ fund?

Fund C:

Fund D:

Q3: Deceptive Allocations

Going by SEBI’s definition, in the so-called ‘Balanced Advantage’ funds, the equity/ debt allocation is required to be managed “dynamically”.  While some may consider that term to be all-encompassing, from what I have gathered, the purpose of having this category is to group those funds where the equity/ debt mix will be decided through a process of tactical asset allocation.  As it happens, at least one fund house either has an extraordinarily restrictive interpretation of what ‘dynamic’ means or has chosen not to make tactical calls.  The equity allocation of its ‘Balanced Advantage’ fund has remained in a remarkably narrow band and has had little resemblance to that of any other ‘Balanced Advantage’ fund.  But it has had more than a passing resemblance to the equity allocation of the ‘Aggressive Hybrid’ fund managed by the same fund house.  Given below is the unhedged equity allocation for the last 12 months for the two schemes.  Based on this information, can you identify which of these is the ‘Aggressive Hybrid’ fund and which is the ‘Balanced Advantage’ fund?

Q4: Deceptive Risk Profile

‘Credit Risk’ Funds are required to have at least 65% of their portfolio in securities that are rated AA or lower.  It is generally expected that these funds will carry a higher credit risk than any other class of debt funds.  Given below is the latest rating profile, yield, and maturity of the portfolios of three debt funds, managed by a single fund house.  Based on this information, can you identify which of these is the ‘Credit Risk’ fund?

	Fund G	Fund H	Fund I
Portfolio Composition by Rating
Sovereign/ AAA/ Cash	16%	15%	12%
AA+	9%	9%	11%
AA and lower	75%	76%	77%
Average Maturity (years)	3.1	3.4	2.9
Portfolio Yield	11.7%	11.4%	11.7%

If you’d like to see the answers, click here.

You Can’t Always Believe What Fund Houses Tell You

“Investors should beware of lies, half-truths and dangerous nonsense.”  This was a piece of advice from someone who represents an institutional investor, that came in the course of an exchange we had, earlier this week.  As it happened, a day or so before, I had seen a cautionary tweet by a well known investor on similar lines.  However, the context of our conversation was somewhat different.  While we talked a bit about general opinions aired in the media, our exchange was largely about pronouncements made by fund houses. 

There is nothing new about fund houses making inaccurate statements.  But there are some who feel that the manner in which certain fund houses are increasingly trying to mess with our perceptions, is a cause for concern.  Sadly, there is very little that is done by way of fact-checking, and such assertions are rarely called out.  That means it’s pretty much up to each of us to be on our guard. 

Here are three instances from recent memory that came up in our conversation.  I would suggest that you look at them as illustrative of a larger problem more than an indictment of the individual fund houses.

ICICI Prudential MF

In a recent piece published in The Economic Times, its spokesperson was quoted as saying:

We had nil exposure to debt papers of IL&FS…

The specific context of the statement is not clear- it may have been about their debt funds in general or it may have been about their credit risk fund.  Also, it is not clear as to what point in time is being referred to.  Regardless, I think it needs at least one piece of additional context- that ICICI Prudential, in fact, held paper of IL&FS Financial Services in two of their FMPs that matured a couple of weeks before the downgrade happened, last year.  As per the last disclosed portfolios of these FMPs, in each of these FMPs, the exposure to IL&FS Financial Services was in excess of 13%. I’ll leave it to your imagination to think about what might have happened if the FMPs and NCDs were to have matured just two weeks later.

Mirae Asset MF

A few months ago, Mirae Asset courted controversy over the decision to reclassify its multi-cap fund as a large-cap fund.  There is nothing that can be accomplished by a large-cap fund that cannot be accomplished by a multi-cap fund, and there was no basis for such a step to be initiated in the interest of investors.  Still, the fund house persisted in defending the indefensible.  In many quarters, it was felt that this move was connected to the forthcoming launch of its focused fund, which would have a multi-cap orientation.  The fund house denied this.  In a piece that appeared in The Economic Times, its spokesperson was quoted as saying:

We are coming up with a focused fund which should not be confused with a multi cap scheme.

Barely three weeks later, in a piece that appeared in Mint, this was how he was quoted describing the focused fund:

It is a true-blue multi cap with no sector or segment bias.

For whatever it is worth, it seems that as per the last portfolio disclosure, 19 of the 28 stocks in the new fund are also part of the erstwhile multi-cap fund (now large-cap fund), with a portfolio overlap of 45%.

Kotak Mahindra MF

Kotak Mahindra was recently in the spotlight for withholding part of the maturity payments to some of its FMP investors.  This had been triggered by its questionable exposure to Essel group companies and complexities arising out of collecting on that debt (I call it a default).  As I had written in an earlier post, one of its spokespersons was quoted as making a series of bizarre statements, most notably this:

I tend to disagree that it is a call gone wrong…

But more than any single statement, the entire argument made by the fund house, of acting in the interest of investors, was dubious, and circumvented key facts.  The fact that the decision to invest into debt instruments secured by shares was something they foisted upon investors.  The fact that they went beyond accepted norms of prudence in having concentrated exposures with up to 20% of some portfolios in Essel group companies.  The fact that they increased that risk by opting for zero coupon bonds.  The fact that the mess they eventually faced, could very well have been anticipated and avoided.  I can go on.  Thankfully, someone on Twitter called them out with a blistering tweetstorm.  Here’s the link.

Thoughts On The FMP Fiasco

This is only my second post in the last nine months, and while I’d like to believe that there hasn’t been much to write about all this while, the truth is that ongoing priorities have kept me away, not just from writing, but from closely tracking the fund industry as well.  Still, thanks to the evolving FMP crisis (which I couldn’t ignore) and the incessant cajoling of my collaborators, for whatever it is worth, here it is. 

Anyone who has been following the coverage of the crisis in the media (mainstream and social), would have noted that much of the attention has been on Kotak MF, and on the so-called “safety” of FMPs.  In this post, I’d like to move that spotlight a bit.  The way I see it, firstly, the risks in investing in FMPs are, more or less, the same as they have been over the last several years.  It’s just that many investors, advisors, and fund houses, have been in denial over the fact that portfolio concentration is a bigger risk than credit quality in itself.  While I’ve talked at length about this previously, in this post, I want to talk about the questionable choices made by fund houses this time around, once this risk became a likely reality.  Secondly, I feel that looking at the FMP fiasco from the lens of the decisions of HDFC MF (rather than Kotak MF) offers a better picture of what has happened.  Investors in Kotak FMPs may have been the first to be visibly impacted, but it was HDFC MF that was the first to make the choices that brought us to where we are.

Let me start by flipping back to a month ago.  By my count, there were 6 NCDs issued by three Essel group companies that were due to mature in March.   HDFC MF had investments in two of these companies (across 5 NCDs).  Most of these investments were held in FMP portfolios.  These are the details of those NCDs:

Name of company	ISIN	Date of Maturity
Edisons Utility Works Pvt. Ltd.^	INE097P07047	22 March 2019
	INE097P07062	22 March 2019
	INE097P07096	20 March 2019
Sprit Textiles Pvt. Ltd.#	INE069R07091	22 March 2019
	INE069R07109	20 March 2019

^ Since renamed as Edisons Infrapower & Multiventures Pvt. Ltd.
# Since renamed as Sprit Infrapower & Multiventures Pvt. Ltd.
NCDs whose ISIN is shaded are zero coupon bonds

As you will note from the table, all of these NCDs were slated to mature between 20-22 March 2019.  The reason I mention this is because, in the portfolio disclosure made by HDFC MF, all of these investments were shown to be held in the portfolios of its schemes as on 31 March 2019, more than a week after they were supposed to have matured.  It begs the question- what happened?  If the fund house got back its money on the date of maturity, then why were these investments shown in the scheme books as on 31 March?  And if the fund house didn’t get back its money, shouldn’t these investments have been written off? 

When I first saw the portfolios, I couldn’t figure out what exactly had happened.  Since then, it has come to light that the maturity date of these investments was “revised” to 30 September 2019.  But how did something like that come about?  Surely, an issuer can’t unilaterally revise the date of maturity.  Was this the outcome of the much talked about agreement between the lenders and the Essel group back in January? 

Regardless, in my opinion, there can be no excuse for treating non-payment on the original due date as anything but a default.  What I find especially remarkable is that three of the NCDs above were zero coupon bonds and accounted for over 61% of the value of these NCDs.  To put it differently, these are investments on which the fund house would not have received a single rupee of interest or principal over the last 3 years or so. 

It appears that Kotak MF took a similar stance as HDFC MF in respect of the NCDs it held (which matured on 8 April).  In its case, it appears that all the NCDs that matured were zero coupon bonds.  Personally, I believe that all these investments should have been written off completely.

But coming back to the revision of maturity date, there are two other aspects about this that bother me.  The first relates to investment norms for FMPs.  As per SEBI regulations, a FMP can invest only into securities which mature before the date of maturity of the scheme.  Of the 8 HDFC FMPs that held the aforesaid NCDs, one is maturing on 30 September (i.e. on the revised maturity date).  All the other FMPs (including one that has been decided to be rolled over) were/ are maturing not later than 1 July 2019.  Going by that, revising the maturity date would appear to be in violation of the SEBI MF regulations.

The second issue that bothers me is the role of the rating agency.  In December, last year, the rating agency had put the abovementioned companies/ NCDs on “credit rating watch”.  On 31 January, soon after the debacle related to the sale of shares of ZEEL, the rating agency put out a note, stating that the rating remained unchanged.  What puzzled me about that note was that the rating agency seemed to base its view more on the stated intent of the lenders and the borrowers, than anything else.  Importantly, there was no mention of any change in the date of maturity of the NCDs.

Then on 18 February, it downgraded the ratings by one notch to A, while maintaining the “credit rating watch”.  But there was still no mention of the maturity of the NCDs being revised.  Its next communication was only on 10 April i.e. three weeks after the original maturity date of these NCDs had passed.  It was here that it noted the revised maturity date of the NCDs.  From what I could gather, and strangely to me, the rating agency didn’t seem to see this as an issue of any significance.  Personally, I think there was a good case for the rating to be downgraded to D.

Looking at this all together, throws up a number of questions.  Why did the fund houses not mark down these investments?   Was it a coincidence that both Kotak MF and HDFC MF decided the same course of action?  Was it a coincidence that the rating agency took a similar view?  Or that the rating agency put out its note only after the NCDs held by Kotak MF had matured? 

One industry insider, whom I spoke to, offered this explanation for the action of the fund houses: “It’s all about the NAV.  They can’t risk showing a low NAV.”  That may well be, and there may be other reasons as well.  One thing appears certain to me: both these fund houses (and perhaps others as well) appear to be desperate to project an illusion of safety around FMPs.  What is worse is that these fund houses are attempting to manipulate investors by playing on their behavioural biases. 

Take for instance, the decision by HDFC MF to roll over one of its FMPs.  Like some others, I hold the view that the officially stated purpose behind doing so, is a preposterous and sanctimonious assertion meant to camouflage the fact that the scheme has ~20% of its portfolio in Essel group companies.  But in terms of their relationship with investors, the roll over strikes me as a way to delude the investors into believing that they never risked losing money. 

Similarly, I noted a very careful choice of words by one of the spokespersons of Kotak MF, which also struck me as intended to delude investors.  To paraphrase the comment: “The impact is primarily on the returns, not on principal”.  To which I am tempted to retort: “Have you ever heard of time value of money?”  Even more bizarre was another statement by that person: “I tend to disagree that it is a call gone wrong”.

For anyone still wondering about what the fund houses were thinking, I present this (hopefully accurate) observation from the latest HDFC MF and Kotak MF portfolio disclosures.  While most of the NCDs of Essel group companies were held in FMP portfolios, there were only two open-end debt funds that also held these NCDs.  These were HDFC Credit Risk Debt Fund and Kotak Credit Risk Fund.  Need I say anything more?

Baffling Trades In ICICI Securities

Why would a fund manager buy shares of ICICI Securities in the IPO and then sell them off at a loss, two months later? 

As many of us would know, since its IPO in March, the stock price of ICICI securities has seen a sustained fall.  At no point, thus far, has the price come back to its IPO price of 520.  If I take the month of May in particular, the price ranged between a high of 421 and a low of 352.  Yet in that same month, fund managers across 10 9 schemes that acquired the stock in the IPO, brought down those holdings or exited them completely.  All put together, these fund managers sold off shares worth 96 91 crore at the time of the IPO, at a loss of somewhere between 19% to 32%.

The table below lists the schemes that took this hit.

Schemes that sold shares of ICICI Securities in May 2018

	No of shares bought in IPO Price: 520	No of shares sold in May   Price: 352-421
HDFC TaxSaver	981,120	508,500
Axis Long Term Equity Fund	480,788	480,788
Reliance Growth Fund	288,456	288,456
Reliance Banking Fund	192,304	192,304
Edelweiss Maiden Opportunities Fund-1	96,180	96,180
UTI Multi Cap Fund	96,152	96,152
Edelweiss Long Term Equity Fund	96,152	86,183
Kotak Bluechip Fund	63,448	63,448
Kotak Equity Savings Fund	30,744	30,744
UTI Banking and Financial Services Fund	288,484	3,957

Data Sources: BSE, NSE, RupeeVest.

The way I see it, a couple of months is just too short a period for a long term investor to have drastically changed one’s view on this stock.  So what else could explain the actions of these fund managers? 

One view is that the fund managers may have been forced to do this on account of scheme reclassification.  That doesn’t make sense to me because the stock fitted comfortably into the portfolios of all of the schemes on the list above.  Another view is that this might have been done to meet redemptions.  But the extent to which most of these fund managers reduced their positions makes me doubt that.  As it happens, one of the schemes on the list is a closed-end scheme while three others are ELSS.  A third view is that the fund managers may have decided to cut their losses.  While that’s not implausible, it strikes me as an approach that a trader would take and not something that a fund manager would do. 

As I took a closer look at the numbers, something else emerged.  This pertains to three two fund houses whose schemes are listed above: Kotak Mahindra MF, Reliance MF and  UTI MF.  It turns out that in the same month, while their schemes listed above reduced or exited their holdings, there were other schemes managed by these fund houses where the exposure to ICICI Securities was increased.  In the case of the latter two fund houses, the shares sold in one scheme were identical to the shares bought in another scheme, suggesting the possibility that these might be inter-scheme transfers.

Fund houses that took contradictory action on ICICI Securities in May 2018

	Action taken	No of shares
Kotak Mahindra MF
Kotak Bluechip Fund	Sale	63,448
Kotak Equity Savings Fund	Sale	30,744
Kotak Emerging Equity Scheme	Purchase	154,828
Reliance MF
Reliance Growth Fund	Sale	288,456
Reliance Banking Fund	Sale	192,304
Reliance Focused Equity Fund	Purchase	192,304
UTI MF
UTI Banking and Financial Services Fund	Sale	3,957
UTI Multi Cap Fund	Sale	96,152
UTI Value Opportunities Fund	Purchase	96,152

Data Source: RupeeVest.

Frankly, I can’t think of any good reason why a fund house would have sold its loss-making investments in one scheme only to buy those shares in another scheme. 

In fact, looking at all of this, makes me question the credentials of the concerned fund houses and fund managers to manage long-term investments.  I came upon all of this information, quite by accident.  But now I wonder that beyond ICICI Securities, where else may something like this have happened, and how often it might have happened.  I guess that unless these fund houses/ fund managers decide to open up about this, we may not know.  Personally, I think that investors in these schemes should press hard for answers.

Correction: The original version of the post incorrectly identified UTI Multi Cap as a fund that had sold shares of ICICI Securities.  That scheme was merged into UTI Value Opportunities Fund.  I apologize for the inaccuracy.

More Questions For Kotak AMC

These are questions that have been triggered by readers of this blog in the wake of my last post.  To make the questions more understandable, I have added context and comments.

Q1: Why should investors in Kotak Opportunities Fund, still stay invested?

As per the latest fact sheet, there are ~138,000 folios under Kotak Opportunities Fund.  I am not an investor, but if I was, I’d need a lot of convincing to believe that the fund house has been acting in my best interests.  Why?  Consider the facts that I presented in my last post:

• Since 2012 (if not earlier), Kotak Opportunities and Kotak Select Focus have had largely identical portfolios
• Since 2012, Kotak Opportunities and Kotak Select Focus have had the same fund manager

Despite that (based on daily data from Sep 2009 to Apr 2018),

• Over 1 year periods, 83% of the time, Kotak Opportunities gave less returns than Kotak Select Focus. 
• Over 3 year periods, 98% of the time, Kotak Opportunities gave less returns than Kotak Select Focus. 
• Over 4 and 5 year periods, 100% of the time, Kotak Opportunities gave less returns than Kotak Select Focus. 

As I asked in my post, how is this possible?  Is it purely by chance?  Is the better performance of Kotak Select Focus merely a fluke?  Or is there something else to all of this?

I would like to believe that it is chance.  Unfortunately, for reasons best known to them, the fund house has chosen not to confirm this.  And now, the reader who raised this question, brought some information to my notice which makes me doubtful that this is pure chance.  Consider these facts (based on the last available SID) about how the fund manager has divided his own investments across these schemes:

• Investment by fund manager in Kotak Select Focus: 3.32 crore
• Investment by fund manager in Kotak Opportunities: 6.31 lakhs

So what should one read into this?  Does the fund manager lack confidence in Kotak Opportunities?  If so, why not ask the investors in Kotak Opportunities to switch to Kotak Select Focus?

Q2: Leave aside Kotak Select Focus.  Why should investors have any confidence in ANY of their other equity schemes?

Now, why would somebody think that?

I was presented two reasons.

One reason has to do with Kotak Mahindra Pension Fund, which is a JV between Kotak Mahindra AMC and Kotak Mahindra Bank.  As a couple of readers pointed out, it seems that for some time now, the equity schemes managed by Kotak Mahindra Pension Fund have been investing their corpus in equity schemes of other fund houses rather than directly into stocks.  To the best of my knowledge, they are legally allowed to do so.  Nonetheless, it begs the question: why? One reader wondered why couldn’t they replicate the “success” of Kotak Select Focus in that scheme.

The bigger point, though, is that investing into schemes managed by other fund houses doesn’t speak well for an entity that claims the expertise that they do.  It simply doesn’t inspire confidence in their fund management capabilities.

For those who are interested, the table below gives the equity holdings of the Tier I equity scheme managed by Kotak Mahindra Pension Fund.

NPS Trust A/c Kotak Pension Fund Scheme E Tier I

Equity Holdings: 31 March 2018
ABSL Top 100 Fund	9.64%
ABSL India GenNext Fund	9.10%
ABSL Frontline Equity Fund	9.64%
DSP BlackRock Opportunities Fund	9.02%
Franklin India Bluechip Fund	9.56%
Franklin India Prima Plus	8.04%
ICICI Prudential Focused Bluechip Fund	9.31%
Mirae Asset India Opportunities  Fund	8.56%
SBI Bluechip Fund	9.45%
SBI Magnum Equity Fund	7.22%
SBI Magnum Multiplier Fund	9.03%

Scheme names have been reproduced as mentioned in the portfolio disclosure, correcting only for typo errors.  Following the SEBI directed categorization and rationalization, the names of some of these schemes have been changed. 

The second reason is similar to what brought about the first question.  It isn’t just Kotak Opportunities: in all of the open-end diversified, domestic funds managed by the fund house (other than Kotak Select Focus), the respective fund managers have negligible investments, or no investments at all.  The table below gives some details.

Investments by equity fund managers in schemes managed by them
Amounts in Rs. Lakhs

	2016	2017
Kotak 50	6.61	11.26
Kotak Classic Equity	Nil	Nil
Kotak Midcap	0.75	Nil
Kotak Emerging Equities	1.85	Nil

Compiled from SIDs dated 26.06.2016 and 26.06.2017

I want to make something clear.  In isolation, I wouldn’t read much into the extent of investment made by a fund manager.  Yes, I applaud fund managers who make significant investments in schemes managed by them, but I don’t hold it against a fund manager for making a negligible investment, or no investment.  There can be valid reasons for that.  In this case, however, there is at least one thing that is different.

In July 2015, the fund house made a public announcement that “its employees will invest only in its own mutual fund schemes” (emphasis mine).  According to the press release, this was based on a belief that like restaurants which display the sign “the owner eats here”, this would show the faith of the employees in their product offerings. 

Well, to extend the same analogy, the owners/ employees may be eating what Kotak Mahindra MF offers, but if the data above is anything to go by, their cooks (the fund managers) seem to largely have an aversion towards their own cooking.  Thus, investors are right to be curious, if not suspicious, about what makes the cooks so averse.

PS: One of my collaborators is willing to wager that in the next updation of the SIDs (due for release shortly), the disclosures will show much more investments by the fund managers in the schemes that they manage.  While I don’t want to bet one way or another, if it does happen, I hope it is because of genuine conviction on the part of the fund managers, rather than because of this blog.

What I Learnt From Kotak Select Focus

Up until two weeks ago, I knew very little about Kotak Select Focus Fund.  I knew who managed the fund.  I was aware of the astounding growth in its AUM- from just over 300 crore at the start of 2014, it had become one of the largest equity funds in the country.  I also knew that in a few days from now, it would be renamed Kotak Standard Multicap Fund.  But that was all that I knew.  Frankly, I didn’t feel the need to know much more.  Experience and common sense have guided me to stay away from fund houses and schemes that grow rapidly in terms of AUM. 

Then, quite out of the blue, thanks to circumstances too convoluted to describe here, I was compelled to take a closer look at this scheme.  In this post, I present some of the lessons that I learnt in the process.

Lesson 1: Some funds have a strategy, other funds just copy that strategy

In the marketing material of Kotak Select Focus, I saw a strong emphasis on the scheme’s “unique” strategy.  Yet when I examined its portfolio, it appeared that the bulk of the fund’s portfolio was imitating the portfolio of Kotak Opportunities Fund, which had been launched 5 years before Kotak Select Focus.  Going back all the way to 30 September 2012 (the earliest date for which portfolio disclosures with ISIN were available), I could see significant overlap in the portfolios of these two schemes.  The table below gives a glimpse of that.

Kotak Select Focus: Portfolio Overlap with Kotak Opportunities

	No. of Common Stocks	% of Common Stocks	% of AUM in Common Stocks	Exact Portfolio Overlap
30 Sep 2012	37	65%	78%	73%
30 Sep 2013	43	91%	94%	82%
30 Sep 2014	37	77%	83%	75%
30 Sep 2015	39	74%	79%	70%
30 Sep 2016	39	76%	83%	70%
30 Sep 2017	37	66%	76%	66%

Compiled from statutory portfolio disclosures made by Kotak Mahindra MF.

These numbers are all the more stunning when you consider the fact that in the case of both these schemes, there are very few restrictions on the market capitalization of the stocks that they can invest in.  The fund house could easily have created distinctive portfolios for both these funds yet, for some reason, it chose not to.

So why did the fund house launch Kotak Select Focus in the first place?  Why have they been touting its strategy as being unique?  And if they didn’t have anything unique to offer, then why didn’t they merge the schemes?   I put these and some other questions to the fund house but I am yet to get any answers.   For now, I am inclined to infer that while there was a unique strategy for Kotak Opportunities, the strategy for Kotak Select Focus was to largely mimic that strategy.

Lesson 2: Star ratings and return rankings can be awfully misleading

This is not a new lesson for me: it’s just that after seeing the star ratings of Kotak Select Focus, it was put into sharp focus (no pun intended).

One of the many problem areas with star ratings is the way in which rating agencies classify schemes.  Regardless of a scheme’s investment objective, Value Research and Morningstar have their own view on how to classify it.   What’s more, their classification can change from time to time.  The recent reclassification of Kotak Select Focus by Value Research illustrates the confusion that it can cause.

For most of the scheme’s existence, Value Research classified Kotak Select Focus as a multi-cap fund.  A few months ago, it reclassified it as a large-cap fund.  The impact on its star rating was immediate.  From a 4 star fund, it became a 5 star fund.  That’s because under the new classification, it was compared with large-cap funds (and not multi-cap funds).  Also, its return ranking changed immediately.  For those who find that difficult to follow, here’s a simplified snapshot (using data from Value Research) that may help to explain the difference:

• As on 30 Apr 2018, based on trailing 5 year returns among large-cap funds (regular), Kotak Select Focus was ranked No.2 (out of 85 funds).  If it had been classified as a multi-cap fund, it would have been ranked No.14 (out of 57 funds).
• As on the same date, based on 3 year returns among large-cap funds (regular), Kotak Select Focus was ranked No.3.  If it had been classified as a multi-cap fund, it would have been ranked No.24.

Lesson 3: Fund performance can sometimes be very hard to swallow

I have come across countless reports that have praised the “consistent performance” of Kotak Select Focus.  In my opinion, these reviewers have failed to see how utterly extraordinary, exceptional and magical the performance of this scheme has been.  Let me explain.

Let’s take the rolling 1 year returns since the scheme’s inception.  Kotak Select Focus gave higher returns than Kotak Opportunities  about 83% of the time. If you go further and consider rolling 3 year returns, it beat Kotak Opportunities 98% of the time. If you consider rolling 4 and 5 year returns, it beat Kotak Opportunities 100% of the time. 

Now, think about this.  When two funds have such persistent similarity in their portfolios, they have an equal chance of outperforming each other.  So how is it that Kotak Opportunities never beat Kotak Select Focus over any 4 or 5 year period, even once?  From where I come, if something like that happened, it would be considered spooky.  That would be all the more so, given that both funds have had the same fund manager for quite some time now.

But that’s not all.

Kotak Select Focus even outperformed the two large-cap funds managed by the fund house (Kotak 50 and Kotak Classic Equity) over almost every rolling 3, 4 and 5 year period.  What’s even more astonishing is that this included periods over which large-cap indices did better than mid-cap indices and broad market indices.  In other words, Kotak Select Focus beat those schemes even at times when those schemes should have rightfully given better returns.  As one of my collaborators called it, “that’s a gravity defying performance.”  I agree.  That’s nothing short of the stuff you see in superhero movies.

So how is it that this fund has had such a casino-beating winning streak, if I may call it that? 

While I would love to hear what the fund house has to say about that, given the lack of response from them to my earlier questions, I am not sure if I’ll know anytime soon.

Special thanks to Robin Jehangir for his invaluable inputs.

How Fund Houses Are Trying To Sabotage SEBI’s Expense Ratio Reforms

Seeing the things that some fund houses do, frequently gives me the feeling of watching cheap crooks in action.  The type that get a thrill from travelling without a ticket.  The type that like to steal from the weak and elderly.  The type that give a stupid grin when caught with their hands in the cookie jar.  Except that there’s nothing cheap about the scale on which fund houses operate.

It’s been a month since SEBI’s disclosure norms for expense ratios came into effect.  They were among the most significant set of reforms undertaken by SEBI in recent times.  They were intended to boost transparency, and bring down costs.  Yet the fact is that some fund houses have lacked the ability to appreciate the spirit of those moves, while others have plain ignored it. Worse still, some fund houses have shown no respect for investors or for SEBI and have, in effect, mocked the process of reforms (see here, for example).  In this post, I want to give a sense of how widespread this is.  I will talk specifically on one key issue i.e. the expense ratio files that fund houses have put up on their websites.  I hope to spotlight the questionable approach of multiple fund houses, and the message that they appear to be giving to their investors. It is based on what I have seen across the websites of select fund houses: it is not an exhaustive analysis. 

“Don’t visit our website!”
On many fund house websites, locating the expense ratio file can be a tall order.  It might be under disclosures, or under downloads, or somewhere else.  Probably no fund house has made it tougher to locate the file than Kotak Mahindra MF.  Leave aside the fact that its website is a sprawling mess, or that it does not seem to have even the option for a search.  When I tried looking for the file, I just couldn’t find the link.  It wasn’t even on the sitemap.  Finally, I had to do a search on Google to get to the file.  Just so that you know, when it comes to other fund houses, doing a search on Google isn’t going to necessarily help.

“We’re going to make it really difficult for you!”
What if you want to compare expense ratios across all schemes of a fund house?  Many fund houses have presented their data in such a manner that it is not easy to do so.  Some, such as IDFC MF and Kotak Mahindra MF have given the data for each scheme in a separate sheet, making it a gruelling task to do such comparisons.  Others like  ICICI Prudential MF and SBI MF have made the task even more laborious because they have opted to have separate files for each scheme.  Thus, instead of a single download, they expect you to make multiple downloads, each time you want to see the data.  And given the number of schemes that they have, that, by itself, could take a really long time. 

“We’re going to make it really, really difficult for you, and we don’t care what SEBI thinks!”
Getting expense ratio information from the HDFC MF website poses a different level of difficulty.   The fund house first wants you to decide whether you want current data or historical data.  If it is historical data, then you are expected to put in a date range.  Thereafter, just like ICICI Prudential MF and SBI MF, you have to download the data for each scheme separately.  Last, but not the least, the information in the files is presented in a format that is different from what SEBI has stipulated.  As a result, if you simply want to compare expenses across direct and regular plans of a single scheme, doing so is an uphill task.

“We’re going to drive you nuts, and SEBI can’t do a thing about it!”
In what I would describe as a drastic departure from SEBI’s format, DSP BlackRock MF and IDBI MF (and possibly others) have opted to give the expense ratios for each date in a separate file.  Consequently, if you want to examine the date-wise expense ratios in any single scheme, be prepared for a nightmarish experience.  In the case of IDBI MF, if you want to compare expense ratios across schemes on any single date, that task will also prove to be arduous because the information for each scheme is in a separate sheet.  In my opinion, of all the fund houses, the approach taken by IDBI MF is either the most harebrained or the most sadistic.

“We’re the most investor-friendly!”
I have to admit that, going into this exercise, I did not expect UTI MF to emerge as the best example of a fund house conforming to SEBI’s disclosure.  Fact is, it was a delight to see what the fund house has done: I just hope that they keep it up.  All you need to do is to select a date range.  You can then download the daily expense ratios across all schemes, exactly the way SEBI has specified, and all in a single sheet.  What’s more, the scheme names are entered in such a way that using the feature of filters in Excel, you can easily make comparisons across schemes.  I am not sure if what they have done can be improved but as things stand, every fund house should at least follow their lead.

10 Years After The 2008 Peak

On Jan 8 2008, the BSE Sensex closed at a then all-time high level of 20,873.  This week, as it hit new all-time highs, I have been poring through performance numbers of equity funds over these last 10 years.  In this post, I’d like to share some of my observations and thoughts.

Is this what we expected?
“How much return would you expect the Sensex to give over a 10 year period?”  Back in the day, I would pose this question to advisors and investors, as part of a long-running series of exercises that I conducted.  Throughout 2007-08, the most common answer I got was “at least 15% p.a.”.  It was an understandable response.  The growth in the Sensex from its base date in 1979 to its value at the end of December 2007, stood at just over 20% p.a. (without reinvesting dividends).  Some would consider the estimate of 15% p.a. to be too high.  The most conservative estimates that I heard were of a growth of no less than 10% p.a.  Yet, the fact is that over the last 10 years, the BSE Sensex TRI grew by just 6.6% p.a.  The BSE MidCap TRI did a bit better, growing by 7.9% p.a.  And for whatever you may find it worth, the BSE SmallCap TRI grew by just 5.3% p.a.  All these numbers pale in comparison to the fact that a 10 year deposit with SBI over the same period would have given an assured compounded annualized rate of 8.78%.

So, going forward, could such long-term underperformance by equity indices be a more frequent occurrence, or is this just a blip?  When I discussed these numbers with a prominent industry observer, he responded with a quote that is frequently attributed to Keynes: “Markets can remain irrational far longer than we can remain solvent.”

How much value did actively managed funds really add?
Of the 140 actively managed, domestic, diversified equity funds that survived these 10 years, only 2 schemes gave an annualized return in excess of 15% p.a.  While the median return of this group was 9.2% p.a., 61 schemes (i.e. 44% of all schemes) gave less returns than the SBI deposit would have.  Of these, 28 schemes (20%) gave less returns than the BSE Sensex.  All these numbers exclude entry loads, which were prevalent at the time.

How did the largest schemes perform?
The table below gives the list of the largest equity funds (by AUM) at the end of December 2007 along with their returns over these 10 years.  Some of the names on this list may surprise those who weren’t investors at the time.  I can’t say how many investors were committed to being invested in these schemes for 10 years or more.  For those who were, it is a moot question as to whether their faith in these schemes was justified.  For better context, I have also given the ranking of these schemes based on their return.

	AUM Rank Dec 2007	Return p.a. 2008-2018	Return Rank 2008-2018
Reliance Growth Fund	1	9.9%	72
Reliance Diversified Power Sector Fund	2	4.1%	181
HDFC Equity Fund	3	11.4%	37
ICICI Prudential Infrastructure Fund	4	4.8%	173
DSP BlackRock India T.I.G.E.R. Fund	5	5.6%	155
Reliance Vision Fund	6	7.8%	116
Fidelity Equity Fund*	7	10.2%	65
Franklin India Flexi Cap Fund	8	10.2%	66
SBI Magnum Taxgain Scheme	9	8.2%	105
Reliance Focused Large Cap Fund	10	5.6%	156

Returns are for the period 8 Jan 2008 to 8 Jan 2018 and exclude loads.  AUM and Return ranking is among all open-end equity funds that survived these 10 years.  Total no of funds: 202.
* This scheme has seen a change in fund house management from 2008 to 2018.
Data/ Information sources: AMFI, NJ India Invest, Value Research

How many of us could predict the top performers?
The table below gives the list of domestic, diversified equity funds which gave the highest return over these 10 years.  Alongside I have given their ranking among equity schemes based on their current AUM, as well as their AUM ten years ago.  Going by their AUM ranking ten years ago, it would seem that most investors weren’t betting big on most of these schemes.

	Return p.a. 2008-2018	AUM Rank Dec 2007	AUM Rank Current
HDFC Mid-Cap Opportunities Fund	16.5%	36	4
DSP BlackRock Micro Cap Fund	16.0%	108	26
ICICI Prudential Value Discovery Fund	14.7%	97	5
Canara Robeco Emerging Equities Fund	14.5%	257	59
Franklin India Smaller Companies Fund	14.2%	49	23
Sundaram Select Midcap Fund	14.0%	19	29
DSP BlackRock Small and Mid Cap Fund	13.8%	44	35
IDFC Premier Equity Fund*	13.6%	77	30
UTI Mid Cap Fund	13.5%	114	44
L&T Midcap Fund*	13.4%	239	86

Returns are for the period 8 Jan 2008 to 8 Jan 2018 and exclude loads.  AUM ranking is among all open-end equity funds.  Current AUM ranking is based on AUM  at end of Nov 2017 which is the latest date for which data was available across all fund houses.  Total no of funds- Dec 2007: 287; Current: 385. 
* These schemes have seen a change in fund house management from 2008 to 2018.
Data/ Information sources: AMFI, NJ India Invest, Value Research

How important is the long-term performance of a scheme to investors?
This is the question that bothers me the most.  It is widely recognized that a scheme’s long-term, multi-cycle performance is a good indicator of a fund management team’s competence.  However, if the current AUM of equity schemes is anything to go by, it would seem that long-term performance of a scheme doesn’t really matter to many investors.  As evidence, consider this: three of the ten largest actively managed, diversified equity funds today, did not exist 10 years ago.  These three schemes currently have a combined AUM of ~47,000 crore.  In other words, investors have poured significant money into schemes that were not tested in the brutal bear phase of 2008-09.  I find it all the more astonishing given that two of the fund houses behind those schemes had a patchy record with their other schemes during 2008-09 while the third fund house itself did not exist at the time (nor did its sponsor have any known track record of fund management). 

That’s not all.  There is one more statistic that quantifies the lack of consideration for long-term performance.  It is that the actively managed, domestic diversified schemes that actually underperformed the BSE Sensex over the past 10 years currently have a combined AUM of ~19,000 crore.  If you include thematic/ sector funds, that number goes up to ~32,000 crore.

Warren Buffett famously stated that risk comes from not knowing what you are doing.  While past underperformance (or absence of performance) is no guarantee of future underperformance, I hope investors in all these schemes know what they are doing.

Total Return Index Benchmarking

Around six weeks ago, DSP BlackRock MF stated its intention to “compare its funds’ performance” to the total return of their respective benchmark indices.  A few days later, Edelweiss MF made a similar announcement.  While these were noteworthy decisions, I couldn’t quite understand the need for these fund houses to formally proclaim their intentions to the world at large.  To be honest, a part of me felt that these announcements had a holier-than-thou ring about them.  More than that, though, it was the wide media coverage of these announcements that stood out for me.  Sure, it was helpful in spreading awareness about the difference between a Total Return Index (TRI) and a Price Return Index (PRI).  But beyond that, it seemed to me that most of the coverage was hype and lacked clear perspective.  In this post, I’d like to chip in with some scattered thoughts.

TRI benchmarking has little to do with appropriateness
By any reasonable standard, the appropriateness of a scheme’s benchmark index is determined by the similarity of the constituents of the benchmark with the universe of securities that the scheme will invest into.  So, for a scheme that invests in large cap stocks, the Nifty 50 or the BSE Sensex could both be appropriate benchmarks.  It is a fund house’s individual decision as to which index to choose as the formal benchmark.  As for choosing a TRI over a PRI, that has little to do with appropriateness in that sense: it is more like raising the height of a hurdle to jump over. If a fund house chooses a TRI over a PRI, then at best it can be assumed to be signalling its intent to raise the bar for its performance.  Bear in mind, though, that a fund house can raise the bar for its performance in any number of ways, and without making such announcements. 

Where will performance be reported?
Even if a fund house chooses TRI benchmarking, its performance reporting will be restricted to documents that are released by it (e.g. fact sheets, SID, KIM etc.).  So, to investors who prefer to compare scheme performances across multiple fund houses, such reporting will be of little use. 

Investors can choose their own benchmark
No matter what benchmark index a fund house chooses, in analyzing the performance of a scheme, an investor is always free to use whatever benchmark index he or she thinks appropriate.  For example, in all instances of index data used by me on both my blogs, I have used total return numbers only.  It is not as if that is necessarily better than using price return numbers: it is merely an expression of my personal belief.  And I have done so, regardless of what practice the industry or individual fund houses have followed.

The notion of “alpha” varies
There are some who argue that a TRI is a better choice for accurately determining “alpha”.  In my opinion, a lot depends upon how one defines “alpha”.  For those who regard “alpha” as a mathematical formula, it is understandable for them to prefer a TRI over a PRI.  But in my experience, for most people who look for “alpha”, it is just a broad appraisement of the value added by a fund manager.  Sure enough, some of these people assess “alpha” against a TRI but there are many to whom the TRI/ PRI choice may be inconsequential.  There are also those who believe in assessing “alpha” against an appropriate index fund (rather than an index) while there are yet others who, in their own wisdom, assess “alpha” against the returns from a bank deposit.

TRI benchmarking is not new in India
In conversations with investors and advisors, I gathered that quite a few of them were under the impression that these announcements were pioneering/ ground-breaking in the context of the Indian fund industry.  In fact, there was at least one report, in The Economic Times, which credited DSPBR MF as “the first fund house to start with this practice”.  The truth is that Quantum MF has been following TRI benchmarking for years, for both its equity schemes, as well for its Nifty ETF.  Other fund houses following this practice selectively include IDBI MF and Kotak MF (thanks to one scheme taken over from the erstwhile Pinebridge MF).  And then there are some fund houses that have taken a somewhat convoluted approach, if I may call it that.  To take an example, SBI MF compares the returns of its Nifty Index Fund with the Nifty 50 PRI, but measures its tracking error against the Nifty 50 TRI.  As far as I am aware, none of these fund houses trumpeted their decisions and perhaps, for that reason, these haven’t attracted the media coverage that the more recent announcements have.

Excessively Expensive Income Funds

For some time now, I have been trying to maintain a watch list of the most expensive plans among income funds.  While expenses matter regardless of fund category, in the case of income funds they have a more consistent and harder impact (than, say, in the case of equity or balanced funds). Much more often than not, higher expenses lead to low returns or higher risk or both. 

While pursuing this objective, one of my most striking observations has been that the plans that I consider to be excessively expensive, account for a large chunk of the AUM in the category.  If I go by last quarter’s AAUM data, then 69% of the money invested in regular plans (i.e. other than direct) of income funds (other than liquid funds and pure debt fixed maturity plans) was allocated to plans that I consider to be excessively expensive.  This could mean one of two things: either my threshold for expensiveness is too low or most investors in regular plans have been sold plans that are way too expensive.  For those who want to explore the truth of the matter, in this post I present a small selection of the income funds on my list.  But before we get into the specifics, there are a few things to bear in mind. 

Firstly, evaluating and explaining a plan’s expensiveness can be a far more complex exercise than most people realize.  In presenting the data in this post, I have opted to keep things simple (some may regard it as an oversimplification).  I have limited the scope of my presentation to non-direct plans, and have primarily focussed on each plan’s expense ratio relative to that of peer group schemes. For the purpose, I have grouped schemes into five categories.  While I have tried to keep things as objective as possible, in any discussion on expensiveness, some degree of subjectivity/ personal bias is unavoidable.

Secondly, against each scheme that I have listed, I have given the current AUM of its non-direct plans.  This is intended to serve two purposes.  For one, it tells you how much money stands invested in these expensive plans.  Additionally, it can help you better understand a plan’s expensiveness.  As a rule of thumb, schemes with larger AUM are expected to have lower expense ratios than schemes with lesser AUM.  Similarly, schemes with larger AUM than most of their peer group should ideally have expense ratios that are below the category average. 

Thirdly, bear in mind that this is a small selection of schemes from my list.  My complete list of excessively expensive plans is too long and complex to be meaningfully presented here.  The plans presented below are not necessarily the most expensive ones: they are some of the most expensive ones.  They have been handpicked to show how widespread the problem of high expenses is.

Lastly, what you see below is not the ideal way that I would like to present this information.  I am compelled to do so because of the constraining ways in which fund houses report expense ratios and AUM data, and because many fund houses frequently change their expense ratios.

Ultra Short Term Schemes
Average Current Expense Ratio: ~0.75%

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
IDBI Ultra Short Term Fund	1.40%	410 cr
ICICI Prudential Savings Fund	1.38%	7,057 cr
SBI Savings Fund	1.36%	3,546 cr
DHFL Pramerica Low Duration Fund *	1.24%	686 cr
HDFC Cash Management Fund - Treasury Advantage Plan	1.13%	10,768 cr

With one exception, this category covers all schemes currently classified by Value Research as ‘Ultra Short Term’.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments. Schemes whose expense ratios are shaded in yellow have above-average AUM in the category.

* One plan in which fresh sales have been suspended since 2012 but in which there continues to be AUM had an expense ratio of 2.51% in FY 17.

Short Term Schemes
Average Current Expense Ratio: ~0.94%

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
HDFC Regular Saving Fund *	1.79%	4,517 cr
Franklin India Short Term Income Plan	1.57%	7,000 cr
Sundaram Select Debt Short Term Asset Plan	1.48%	307 cr
Aditya Birla Sun Life Short Term Opportunities Fund	1.40%	4,605 cr
IDFC Super Saver Income Fund - Medium Term Plan	1.31%	2,057 cr
ICICI Prudential Short Term Fund	1.24%	6,329 cr

This category covers all schemes currently classified by Value Research as ‘Short Term’.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments.  Schemes whose expense ratios are shaded in yellow have above-average AUM in the category.

* (1) The expense ratio of the regular plan of HDFC Regular Savings Fund saw one of the steepest jumps in the category from 1.07% in FY 16 to 1.79% in FY 17.  (2) The expense ratio of the direct plan in FY 17 was 1.19% which was higher than the expense ratios of the regular plans of most schemes in the category.

Medium Term/ Long Term/ Dynamic Schemes
Average Current Expense Ratio: ~1.43%

In my opinion, this category as a whole, is somewhat more expensively priced than it should be.  By my reckoning, if it were to have been fairly priced, then at this point in time, the average current expense ratio for this category should have been ~1.07% (disclaimer: based on complex calculations, subjective assumptions, and personal bias).

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
Sundaram Bond Saver	2.61%	120 cr
Sundaram Income Plus *	2.23%	117 cr
Franklin India Income Builder Fund	2.08%	872 cr
Reliance  Income Fund	2.00%	499 cr
Aditya Birla Sun Life Corporate Bond Fund	1.97%	2,947 cr
HDFC Income Fund	1.96%	1,086 cr
HDFC Corporate Debt Opportunities Fund	1.84%	10,724 cr
Franklin India Corporate Bond Opportunities Fund	1.83%	6,237 cr

With one inclusion, this category covers all schemes currently classified by Value Research as ‘Credit Opportunities’, ‘Income’ and ‘Dynamic Bond’.  The inclusion is Sundaram Income Plus which is currently classified by Value Research and Morningstar as ‘Ultra Short Term’.  Since its stated benchmark is CRISIL Composite Bond Fund Index, I feel it appropriate to include it in the present category.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments. Schemes whose expense ratios are shaded in yellow have above-average AUM in the category. 

* (1) Over the last 3 financial years, the expense ratio of the regular plan of Sundaram Income Plus has seen a remarkable level of fluctuation, changing from 2.17% in FY 15 to 0.38% in FY 16 to 2.23% in FY 17.  (2) The expense ratio of the direct plan of Sundaram Income Plus in FY 17 was 0.22%.  As far as I can make out, the difference between the expense ratios of the regular plan and the direct plan of the scheme was the highest for any pure-debt scheme.

MIP Schemes
Average Current Expense Ratio: ~2.15%

In my opinion, this category as a whole, is way too expensive.  Consider this: in the case of many fund houses, if you were to create an MIP-type allocation on your own by investing in their most expensive equity scheme, and their most expensive debt scheme, that would be cheaper than investing in their MIP schemes.  By my reckoning, if it were to have been fairly priced, then at this point in time, the average current expense ratio for this category should have been ~1.26% (previous disclaimer applies).

	Expense Ratio Regular Plan FY 17	Current AUM Non-Direct
DSP BlackRock Monthly Income Plan	2.60%	447 cr
HDFC Monthly Income Plan - Short Term Plan	2.60%	322 cr
BNP Paribas Monthly Income Plan	2.59%	327 cr

This category covers open end income schemes that allow for marginal equity allocation, and which are targeted at investors seeking regular income.  Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments.

Closed End Income Schemes With Marginal Equity 
Average Current Expense Ratio: ~2.31%

In my opinion, this is, by far, the most expensive category of income funds.  In terms of asset allocation and return potential, it is similar to the category of MIP schemes.  However, the essential running costs of these schemes are less (lesser servicing costs, lower portfolio turnover etc.).  As a result, there is a case to say that the average expense ratio in this category should be less than that of MIP schemes.  There is also a case to say that the expense ratios of many plans in this category reflect fund house-distributor collusion with the intent of milking investors, at its ugliest.  By my reckoning, if this category were to have been fairly priced, then at this point in time, the average current expense ratio should have been no more than 1.26% (previous disclaimer applies).

	Average Expense Ratio Regular Plans FY 17	Current AUM Non-Direct
HDFC Capital Protection Oriented Fund - Series III	2.69%	322 cr
DHFL Pramerica Hybrid Fixed Term Fund (Multiple Series)	2.65%	634 cr
Sundaram Hybrid Fund (Multiple Series)	2.65%	520 cr
Axis Hybrid Fund (Multiple Series) *	2.53%	6,474 cr
ICICI Prudential Multiple Yield Fund (Multiple Series)	2.51%	1,364 cr
Kotak Capital Protection Oriented Scheme (Multiple Series) ^^	2.44%	426 cr
ICICI Prudential Capital Protection Oriented Fund (Multiple Series)	2.34%	3,277 cr

Data for expense ratios has been sourced from scheme annual reports and third party sources.  Data for AUM has been sourced from latest available AAUM disclosures.  While compiling the data, only plans that were in existence on the date of compilation i.e. 21 Sep 2017 have been considered.

* 93% of  the current AUM of Axis Hybrid Fund has come via associate distributors such as Axis Bank.

^^ As far as I can make out, Kotak Mahindra MF does not follow SEBI directions/ industry practices in reporting plan-wise expense ratios in its annual reports. The expense ratio number given here includes both direct and regular plans.  The actual expense ratio for regular plans alone can be assumed to be higher than what is mentioned.