Monday, August 17, 2015

Are mutual fund expenses justified?

My article in Mid-day Gujarati

The English translation is as under:

“Expenses matter. They bring down your return on investments”. Someone argued. He continued, “That is why I buy stocks myself and do not invest through mutual funds.”
This person was referring to the expenses charged by the asset management company towards fund management and administration. His argument is right in a way: lower the expenses, higher the returns. However, this argument looks at only one side: the price, but ignores the other: the value.
Price and value are two sides of the same coin. You pay a price only if you are expecting to get enough value, and not otherwise. Between the two, while price is objective, value is subjective. Price may be the same for everyone, but the perceived value may differ from person to person and from situation to situation. For example, a sweater may cost the same, but offers a different value as per the season.
It is in this context that one should evaluate whether the expenses paid are high or low; justified or not.
So let us look at the expenses charged by various mutual fund schemes. Asset management companies take care of various functions, including management of funds and various other administration tasks, e.g. follow up on corporate actions like dividends, buy backs, bonus, rights, etc. There are teams that handle investor accounts and fund accounts. Trustees ensure that the AMC works in the best interests of the unit holders. Bankers and custodians handle the funds and securities, respectively. Fees for all these activities are paid out of the expenses charged to the fund. The total expenses also include the commission payable to the fund distributors for selling the fund to investors as per the suitability as well as for providing post-dales services.
Consider these tasks to be done yourself. If the cost still works out to be cheaper, one may consider avoiding mutual funds altogether.
Incidentally, in such discussions most investors make the mistake of ignoring the cost of their own time and efforts. Assigning value to these two is very difficult and subjective.
Any decision regarding the cost must be taken only after considering the benefits available for incurring the costs. One must also consider whether the benefits are relevant for one.
Sometimes cost saving may turn out to be the biggest virtue and sometimes it could be “penny wise, pound foolish”.
Happy investing!
-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

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