Mutual Fund Expenses: Investing Costs Can Reduce Returns: Here’s How to Reduce Them
Sumeet can have a significant impact on its investment returns by considering the costs associated with its investments as an integral aspect of decision making. Costs incurred on expenses such as fees, brokerage and commissions eat away at the returns of its investments. In the long term, they can have a significant impact on the value of one’s investments, as expenses reduce the amount that is invested to reap the benefits of compounding.
He must remember that the costs he bears are not only those for which he makes a direct payment, such as brokerage, but also those which are integrated into investments and deducted from his investment value, such as fund costs. mutual funds. The other cost that may be overlooked is that of investment penalties. There may be charges on late payments or early withdrawals of investments which also impact the return generated by his investments.
It should not let investment performance alone dictate its attitude to costs. What may seem like a small charge when returns are good, will be a big drain on returns when performance drops. Regardless of the return the investment is currently generating, it should carefully consider all visible and invisible costs and ensure they are justified before committing, as withdrawing later can be difficult and costly. A high cost can only be justified if the investment consistently generates much higher returns compared to low cost options.
He can avoid penalties to a large extent by automating the operational aspects of investing and ensuring that his portfolio has adequate provision for his liquidity needs so that he is not forced out of an investment in paying high fees. Other things Sumeet can do to eliminate undue costs include asking questions whenever he receives advice on selling an existing investment and investing in a new one. This churning will also result in higher costs.
Sumeet should, where possible, use investment-related service providers who link fees to transactions and do not charge annual fees or flat fees. Flat fees can only be advantageous in situations where the number of transactions will be high enough to spread the costs. Being aware of the cost impact on one’s investments and evaluating the costs associated with each investment before committing will go a long way to ensuring that one’s money is working in one’s best interest.
(Content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)