Key takeaways
- A 1% fee of assets under management can seem small but is not in the long run
- Arthgyaan has shown that, over a lifetime, for a 25,000 SIP per month the difference comes to 9.4 crores
- Rob Berger, Deputy Editor of Forbes Money Advisor, estimates that a 2% fund cost would bring down a retirement portfolio of $3.1 million by $1.7 Million
- Another SEBI registered advisor says that for a high net worth portfolio the costs would amount to giving away 2 apartments for free
- One way you can reduce fund costs is by switching from regular to direct plans of mutual funds. This should save you approx. 1%
- Another additional way to further reduce fund costs is to switch to Index funds as suggested by Warren Buffet. This should save you an additional 0.5%
- With the full 1.5% saving (approx.) suggested by the above 2 actions, a 1 crore portfolio would, over 30 years, be approximately 7.63 crores higher i.e. 48% higher
- If you would like to calculate your potential gains in the manner above, email me on mezjan@investmentcoach.co.in and I’ll send you a simple excel sheet
- While there are many other ways of implementing these cost savings actions, one way to do them is by creating an account on Kuvera using the links at the end of this article
As John Bogle, the Founder of Vanguard (with $10.4 trillion in global assets under management) said “There is no way under the sun to forecast a fund’s future absolute returns based on it’s past record”. However, what is 100% predictable is a fund’s costs & fees and they will steadily eat away into your returns come hell or high water.
This is why saving on fund cost, commissions & fees are the only near guaranteed or sure shot ways of increasing your returns in the future.
For many of the initial years during which I invested, I knew that funds charged a 1 to 2% commission but I felt it was a rather small amount. In fact, I even thought it was quite petty of people to bother about giving away such a small percentage. So I never really bothered to calculate the long term impact or cost of that 1 or 2% commission on my investment portfolio.
However, as I read more on investing, I came across lots of articles that suggested that the long-term impact of even just a 1% commission or fee could be very significant and made the shift myself.
So in this article I do the following:
- Share a few snippets from others who have researched the impact of commissions
- Show how you can easily calculate roughly / approximately what a commission would cost you based on your investment portfolio value & time horizon.
- I mention 2 clear actions you can take to reduce the costs of your investments.
Impact of fund cost over an investment lifetime
Arthgyaan has done this excellent illustration of the impact of a 1% difference in fund cost over an investing lifetime. Over an investing lifetime, assuming a 25k SIP over 30 years at just 7% returns, it estimates that the portfolio that costs 1% less will be 9.5 Crores ahead over the person’s entire investing lifetime !
In another article by Rob Berger, Deputy Editor of Forbes Money Advisor & author of the book Retire Before Mom & Dad, says that a 2% fee could reduce a $3.1 million dollar retirement corpus by $1.7 Million !
Here is another interview with SEBI Registered Investment Advisor, Avinash Luthria, where he says that for a high net worth investor, they are likely giving away 2 apartments worth in fees.
How you can effect similar massive cost savings
You can save costs by taking one or more of the below actions: ***
1. Switch to “Direct” plans to save 1%
As per data from Valueresearch below, this should give you approx.. 1% of savings.
You can do this by using a tool like Kuvera or MF Central or Valueresearch Advisor. You can read the article from Arthgyaan on how to switch from Regular to direct plans of mutual funds
2. Switch to broad market-cap based equity Index funds as recommended by Buffett
Warren Buffet believes that most retail investors will do best by investing in Index funds. And my simple reasoning goes that if Buffett thinks so, who am I to think otherwise? He won a million dollar bet that no hedge fund would be able to beat the S&P 500 Index over 10 years. Moreover, in his own Will, he has directed the trustees of his estate to invest 90% of his estate worth 10s if not 100s of billions into just one low cost S&P 500 Index fund.
So as powerful action number 2, switching to a simple Nifty 50 Index fund should give you an additional 0.5% saving as per data from value research
***Cautionary note: Do not make any switches of funds before consulting your Chartered Accountant (CA). There are significant tax implications of making these switches so do them only after you are clearly aware of the tax impact of each action.
How you can calculate potential cost savings on your own investments
I’ve put together a simple excel sheet so that each person can get a rough / approximate idea of the order of magnitude that they could save by taking such actions as the above.
As an example let’s assume a 1 crore investment that is currently giving you 10% returns. Let’s say you save 1% by way of switching to a “Direct” plan and 0.5% more by switching to an Index fund.
Then over a typical 30 year investment lifetime or conversely and more importantly, over a typical 30 year retirement, the higher cost fund portfolio growing at 10% would become 15.86 Crores while the low cost direct Index fund portfolio generating 11.5% returns would become 23.49 Crores. That means that your final portfolio value is a whopping 7.63 crores or 48% higher !
Since different people have different investment horizons, different rates of returns on their investment & very different investment amounts, you can use the simple spreadsheet that I have put together to calculate how much a lower cost fund would save you in the long run. Message me on mezjan@investmentcoach.co.in & I’ll be happy to email it to you
Note: Before entering your returns figure into the spreadsheet, it is VERY important for you to know what are the REAL historical returns you have been earning by way of your mutual fund Investments.
Note: This spreadsheet is giving a very rough approximate calculation just so you can get a feel for the order of magnitude of your savings / gains. There might be more accurate calculators out there.
How to create an account, upload and measure your investment returns on Kuvera (you can also switch to Direct plans using Kuvera)
Step 1: Create an account on Kuvera
Step 2: Import all your mutual funds into Kuvera
Step 3: View your portfolio analytics
Step 4: View your returns in the section titled “Portfolio XIRR”.