More investments expected to flow in the Indian insurance sector as IRDAI approves guidelines for PE Funds to become promoters. (Photographer: Akio Kon/Bloomberg)

Investment Fees Are Eating Into Your Wealth

Pinching pennies pays if you are a mutual fund investor. A lot.

Sample this: Over 30 years, just 1 percent fee on mutual fund investments will leave an investor with 25 percent less corpus, according to Kunal Bajaj of online adviser Clearfunds. This money goes to the distributor or the adviser or the bank relationship manager, he said. “It’s your money and someone else’s kids are going abroad to study on it.”

Keeping expenses low is as important for a healthy portfolio as choosing the right investments. A zero-expense investment is a mirage, or a rarity, Bajaj and experts from brokerage and investment bank Ambit Capital said on BloomberQuint’s new show Portfolio. Investors, they said, must try the next best thing: keep them low. Particularly when investing in mutual funds.

Investor awareness is even more important now because Prime Minister Narendra Modi’s November 2016 cash ban has funnelled savings into stocks. Most of it is coming through domestic institutional investors like mutual funds, which on an average saw inflows worth Rs 22,500 crore every month in the last one year.

While the power of compounding works in favour of such investors ploughing money in mutual funds, compounding costs take a toll. One way to reduce that, according to the experts, is buying mutual funds directly.

Assuming large-cap mutual funds give similar returns as Nifty exchange-traded funds from here on, a lower expense ratio will end up working for investors, according to Ambit Capital.

Of the 100 large-cap funds, three or four have proven ability to generate consistent alpha or returns in excess of the benchmark, Ambit Capital Chief Executive Officer Saurabh Mukherjea said. The rest are like buying a glorified tracker fund, he said.

Ambit Capital pits two funds against each other, assuming an investment of Rs 1 lakh a year over forty years earning 15 percent annual return. The first fund has an expense of 2.5 percent a year and the second at 0.1 percent.

The second fund’s corpus exceeds that of the first by:

  • 24 percent after 10 years.
  • 53 percent after 20 years.
  • 80 percent after 30 years.
  • 133 percent after 40 years.

A 20-year-old investor will end up getting Rs 1.1 crore from the first fund against Rs 2.58 crore from the second.

The funds may return beat or lag 15 percent returns, but the impact of the expense will still be meaningful.

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