Mutual Fund Investment: How to Cut Costs for Long-term?

By Mr. Manoj Nagpal, CEO, Outlook Asia Capital

 Over the past few years, mutual fund (MF) expenses have increased by 0.50%-0.75%.

Earlier, an average equity mutual fund used to charge 2%-2.25% which has now increased to 2.50%-2.75%. This is a 25%-30% cost escalation for MF investors.

As a mutual fund investor should you be worried about this cost increase? 

One view is that the significant out performance of Indian equity mutual funds over their benchmarks makes the discussion of expenses irrelevant. 

Equity mutual funds have delivered a significant alpha over two decades and higher expenses do not really matter.

The cost brigade on the other hand argues that higher expenses are a wealth-drain for a long-term investor and with assets under management (AUM) increasing costs should logically be reduced as economies of scale kick in.

 

Manoj Nagpal, CEO,
Outlook Asia Capital.

Let's try to quantify this cost increase for a long-term investor with a time horizon of 10 to 20 years. 

For a goal-based Systematic Investment Plan (SIP), you need to immediately increase your SIP amount by 5%-10% to nullify this cost increase or / else you will fall short of your defined goal. 

So, if you are contributing monthly Rs 10,000 towards your SIP, then increase it to Rs 11,000 so that your final corpus target remains the same. 

Similarly, for a long term lump-sum investor, increase your investment by 6% to 12.5%to counter this cost increase. 

One can argue that for a long-term investor this cost increase by Securities and Exchange Board of India (SEBI, is in effect, equivalent to 5% to 12.5% entry load.

If SEBI is really serious to reduce costs, then it should do the following 3 things. 

First, plug the loopholes. Take the example of additional 0.20% (20 basis points -bps) in lieu of the exit load. The actual credit back of the exit load to schemes is a small fraction of 0.20% collected. This should be limited to the actual exit load collected. 

Also, schemes such as Equity Linked Savings Scheme (ELSS) / close-ended funds, which do not have an exit load, still charge the additional 0.20%. This should be stopped. 

Second, the additional 0.3% (30 bps) for beyond top 15 cities (B15 cities) should be phased out in a defined time frame.

There can not be an indefinite additional cost for long-term investors. 

And, last, any scheme over Rs 700 crore of assets has the same expense limits. 

SEBI should increase these slabs with lower limits of expenses as the paradigm of fund sizes has changed. 

CONTACT DETAILS

Mr. Manoj Nagpal

 MD & CEO,

Outlook Asia Capital

E mail id :m.nagpal@Outlook.com 

C : +91 - 98202 - 93966 

Reach :

Sheela.Ahuja@Outlook.com

http://www.outlookasiacapital.in

https://in.linkedin.com/in/nagpalmanoj

Registered Office: 

79, Yashodha, Irla Bridge, 

S.V. Road, Andheri (West), Mumbai, India.

BRANCH OFFICE - Mumbai

Appejay House, 

3 Dinshaw Vachha Road,

Churchgate,  Mumbai - 400020

Tel: +91-22-2202 9966

Share: