Fund houses have hiked the charges for investors.
You might not have noticed it, but your mutual fund investments may have quietly become more expensive.
The traditional way of investing in mutual funds has suddenly become an expensive proposition.
That's a worrisome thought for the long-term investor, who stands to lose a good part of his wealth to the charges levied by the fund houses that manage his money.
If a fund gives annualised returns of 10%, here is what an investment of `1 lakh will grow to in 20 years at various levels of expense ratios.
You might not have noticed it, but your mutual fund investments may have quietly become more expensive.
The traditional way of investing in mutual funds has suddenly become an expensive proposition.
That's a worrisome thought for the long-term investor, who stands to lose a good part of his wealth to the charges levied by the fund houses that manage his money.
If a fund gives annualised returns of 10%, here is what an investment of `1 lakh will grow to in 20 years at various levels of expense ratios.
What investors can do Is there a way out for investors? One way is to identify funds with low expense ratios and invest in them. Index funds and exchange-traded funds (ETFs) typically have lower expense ratios of 1-1.5%, compared to actively managed funds that charge over 2.5%. This may not be a very useful strategy.
Actively managed diversified equity funds charge more, but also deliver higher returns than index funds. In your attempt to save 0.5% in expense ratio, you might forgo the 3-4% higher return from a diversified equity fund.
A well-managed diversified equity fund that can beat its benchmark by a good 2-3 percentage points is certainly a better bet.
For investors, a better option is the direct plan route that market regulator Sebi opened for investors as a New Year gift in 2013. These are sold by fund houses directly to the investor, bypassing the distributors.
Since there is no upfront brokerage or trail commission to be paid to the distributors, these plans have a lower expense ratio as compared to regular plans bought through a distributor.
As the table on the right shows, the difference between the expense ratio of the regular plan and direct plan can be as high as 75 basis points. This is why SIP investors in the direct plan of the Equity fund have earned a significantly higher return than those who put their money in the regular scheme.
Higher returns from direct plans are an outcome of the lower expense ratio for these plans. Retail investors could start shifting to these plans as awareness about the benefits of these plans increases.
To invest in direct plans, you need to do your own research.Since you are on your own, you need to decide which scheme to choose, the fund house and the amount, whether you wish to pick an SIP or invest a lump sum.
Once you have identified the scheme, you have to take care of the operational aspect. If you are a first-time investor, you will need to complete your KYC (know your customer) formalities. If you have an existing investment in any fund house, the KYC procedure will be easier. Fill up the application form
and submit it to the fund house or its registrar (CAMS or Karvy), along with the investment cheque.
Direct investing is far easier if you are Net savvy. Just visit the AMC office once and apply for Internet access to your account. Once your folio is created and you get a PIN (password), you can transact online with the fund house website. You also need to have a Net banking account for this.All your subsequent investments in the fund house, whether in debt, equity or gold funds, can be done under the same folio.
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