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'There was a calculation error in Query Corner' (June 26, 2008 issue)

Thank you for pointing out the error. It’s heartening to know that our readers are well informed and go through the issue with an eagle eye.

     Print Edition: September 4, 2008

I would like to point out a calculation error in the query on the benefit of direct investment in mutual funds (Query Corner, 26 June). There was a table on how the entry load makes a difference to an investment of Rs 1 lakh in the long term. The writer forgot that the entry load is charged on the net asset value (NAV), not on the investment amount. So an entry load of 2.5% on NAV results in a deduction of 2.439% from the investment (the difference between profit on cost and profit on selling price). So the actual figure comes to Rs 2,439 (2.439% of Rs 1 lakh), not Rs 2,500 as was quoted.

Suppose the NAV is Rs 10 and the amount invested is Rs 1 lakh, then:

a) If a person invests directly, no entry load will be charged and he will be allotted 10,000 units.

b) If he invests through a broker and is charged an entry load of 2.5%, he will be allotted 9756.097 units at a price of Rs 10.25 each.

So the extra return for a person who invests directly is Rs 2,439. I have provided the recalculated values in the table.

How entry load matters (on an investment of Rs 1 lakh)

 Through BrokerDirectExtra Returns
Entry load (%)2.5Nil-
Amount that is invested after entry load97,5611,00,0002,439
Value after 1 year1,12,1951,15,0002,805
After 5 years1,96,2302,01,1364,906
After 10 years3,94,6894,04,5569,867
All figures except entry loads are in Rs; Returns are assumed to be 15% per annum

 

— Prof Hariprasad Soni, e-mail

Thank you for pointing out the error. It’s heartening to know that our readers are well informed and go through the issue with an eagle eye. We look forward to such feedback in the future.  (The suggested changes have been made in online version of the story )

In your special issue on mutual funds (Best Mutual Funds, 21 August), I was surprised to see that none of last year’s top 10 funds made it to the list this year. It appears from this exercise that one needs to churn one’s portfolio frequently. Yet, time and again, you suggest that one should remain invested in a fund for four-five years to get significant returns. Aren’t these opposing outlooks that can confuse the readers?

Bal Govind, Bareilly

As pointed out in the story by Dhirendra Kumar, CEO, Value Research, the reason that last year’s top funds did not figure in this year’s list is not because they are bad. The main reason that these funds lost favour is the changing market trends. Most of these funds are still good propositions for the long term and that is why we advised the investors to hold them for the present. Frequent churning of a portfolio is akin to timing the market, which is not a good idea. Also, the top 10 funds in this issue were ranked not just on the basis of returns, but also their risk grades.

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