Mutual Fund Investments: The Costs you actually pay

I have blogged about it many times and here I am saying it again:-  If you read between the fine lines in your mutual fund document you will come to know about the actual costs you have been paying for the investment. The lack of transparency is to keep the investor unaware of the real deal so that the fund companies can boast about their performances and attract more of ignorant investors. Performance benchmarks presented can be misleading if not understood properly……………

 

 

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Invisible Costs: Can you see them?

 

Mutual funds imply many costs such as managerial fee, compliance fee and market expenses etc., which is incurred by none other than investor. Ironically irrespective of the profit or loss on the mutual fund, the fee has to be paid. The cost usually fluctuates around 3 -6% on investment.

 

How does your cost increase?

Annuities, hedge funds, commodity funds and equities can boost up these expenses further. Investors are normally unaware of these costs and how they are calculated. This unawareness is not because investors are ignorant but because of the opacity by the funds. Mismanagement of funds on the other hand also increases cost. Increased transactions boost up cost which helps investors quiet little.

What Does Performance Mean?

If you read between the fine lines of your mutual fund document, you will have an idea about the unsaid costs for your investment. The mutual fund industry boasts about the performance and never talks about the costs. Many of the times, high performances are achieved with higher costs. What you really earn is the difference between performance and cost. A 10% growth with 3% cost is definitely better than 12% growth with 7% cost. Isn’t it?

 

Misallocation!

 Researches in the field reveal that many investors are at risk because of non-diversification of funds. Despite of the hype in Industry, sometimes these funds do not diversify well to suit individual requirements.

Hedge funds and certificates are popular choice among a lot of brokers and banks, but the lack of transparency of information can again be linked with high costs.

 

Why should you care while you are earning?

 While you are making profits, everything seems great but if you calculate the difference you might be well shocked. Imagine a mutual fund is earning 6% on an investment of $10,000 i.e. $600 now would it not make a difference if your costs would be reduced by 3% and then you will earn $900. It will make more difference with increase in investment.

Beating Indexes VS Cutting Costs

 

Beating market index is a real tough nut to crack. Many managers over time have faced a defeat. Real success will lie in cost reduction. Some managers may succeed in cutting the current and set a benchmark but it would only be beneficial to you if the costs do not increase. 2% extra gain with 2% increased cost will mean quiet nothing.

 

Balance and Fairness while building your Portfolio

 

Costs on investments are inevitable but you must get worth for your money. Specialized funds like infrastructure and resources funds are worth additional costs if they help in balancing your portfolio. Other funds with a motive to beat indexes with high costs are not such a good choice. Balancing portfolio should be the primary motive.

Run a Low-Cost Operation

 

Beating indexes is a big rock to move, main strategy should be flowing with current and cutting costs. Avoiding mutual funds altogether is a great way to cut down the costs. Try to match the market when it’s rising and beat it on the way down. Balance your portfolio well in compliance to your needs. Associating yourself with a firm is a better option than picking up a mutual fund.

The cost incurred in one mutual fund investment can be the cost to manage your whole portfolio.

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