Congratulations! So you’ve finally managed to park some funds for investments into Mutual Funds (MF). It’s a great achievement towards a great future. You must have saved this money by cutting corners, giving up on your desires and expecting a great reward after some period.
We also assume that you have identified the best mutual fund product and are planning to write a cheque to invest in it. You have also calculated the rate of return that it claims. But wait. Have you checked out the charges that will be deducted from what is due to you? Remember, not all MF companies will openly disclose this. You have to get into the details.
Financial Institutions managing Mutual Funds are also called Fund Houses. The Securities and Exchange Board of India (SEBI) has permitted them to charge an expense which is called “Fund Management Fees” which can vary from 0.05 to as high as 3%. In addition, there are other deductions like taxes payable on it which can substantially affect your returns. So effectively if your Mutual Fund was able to revenues in the range of 15% per annum over a period of ten years and considering a nominal expense rate of 2% charged to you, you would only be earning around 12%, a clear loss of 3%. In percentage terms, this may appear small but if the amount of funds invested is high, the amount can be staggering.
Let’s look at this in monetary terms. Assume that you have invested Rs.3,00,000/- for a period of 10 years, which at 15% annual growth, should give you Rs.10,55,363/-. If the expenses, at 2% annually are charged, then a whopping Rs.1, 21,822.30 stands to be deducted which comes to an accumulated 13% of your total benefit (which is not the total you were to receive).
Therefore, before investing your valuable funds, it is advisable to undertake extensive research. It is also important to read the fine print in the application form or on the website or in the prospectus. A common man may also not understand the complicated legal lingo since it is drafted by legal experts.
A CFP is expected to help his client plan his/her investment in such a manner that it maximizes the returns on investments. A CFP is very different from your Bank Executive who, in addition to, performing his banking duties, is expected to sell you Insurance, Mutual Funds, Bonds, etc. A CFP is your best investment planner who will provide friendly advice that you will not regret.
– Article by Sarfaraz Lakhani