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Cost | Tumors and Mathematics

Updated: Jan 11

Tumors usually go undetected till they become bigger, or start causing damage that deems attention. The same has been with costs associated with investing; not just in India, but globally, which has drawn infamy around the global financial services industry. Hidden costs are a stigma that every piece of communication from financial services has to mention, even if it stands true just diplomatically, and not fully. Don't get us started with asterisks. They're banned from our communication and their usage is considered okay only if absolutely necessary, or if our legal and compliance teams arm-twist us into it.

One of the most ill-framed structures that has ever existed in investment management is that of kickbacks, or that of fees that are hidden from investors, which apart from the opacity, also have a strong element of misalignment to or misunderstanding of the end beneficiary. The simple principle that needs to be taken seriously, and taken in true spirit is that of fiduciary. Regular plans in mutual funds have been a good example of this in the Indian context. Regular plans have a total expense ratio that is higher compared to direct plans. The excess is passed on to distributors by AMCs for the business they bring in to the AMC.

Problem 1 - the AMC takes money from you, and then passes it on to the distributor. The distributor has provided services to you, you should be the one directly paying the distributor, not the AMC for you. Because this is routed indirectly, most investors don't even realise how much money they end up paying to distributors through their investment horizon.

Problem 2 - the distributor is always incentivised to sell those mutual fund schemes to their clients, which yield them higher incomes. This puts the distributor's interest ahead of that of the end investor. Mis-selling and unsuitable advice are natural outcomes of this process, which don't have a direct monetary outcome in terms of exchange of money. This has been one of the (multiple) reasons why ETFs haven't picked up in India despite them existing for the last decade. With expense ratios of <0.5%, distributors just didn't have enough incentive to recommend their addition to their clients' portfolios. Distributors would barely make money from these instruments, relative to mutual fund schemes.

But this whole system has a larger monetary outcomes because the investor lands up with a portfolio which either isn't suited to their needs, or isn't the best available choice of instrument even if it is passes the suitability criteria.

For years, this system has plagued the Indian investment ecosystem, and it continues to do so. Although regulatory measures have been aimed at increasing transparency, tighter frameworks for intermediaries, more stringent reporting and compliance, etc., these are just steps to reduce the fire, and not extinguish it.

But the gravity of this problem comes to light when you start quantifying the fees being paid over time for your investments. This of course, isn't given to you in a report for you to see, observe and assess. This is something that needs to be calculated by the investor. After all, it's the investor's pocket, and they need to put their hand in it to see how big the hole is.

Let's try and quantify the impact using a simple example. Say you invested Rs. 1 lakh in the year 2020, and over the next 20 years, it fetches you a 10% CAGR.

If you made this investment yourself, you wouldn't pay any fees, and you would end up with Rs. 6.7 lakh at the end of 20 years. But well, you need to devote time and attention to this activity.

And to avoid that, if you invested it in a mutual fund, you would end up paying a 1% management fee. Over 20 years, you would end up paying a fee of Rs. 56,000. Also, think about this, because 1% is stepping out of your corpus every year, you don't get the benefit of 10% growth on the fees that you're paying, which is a cost to you, which doesn't appear as fees, but as an opportunity lost. This way, you would land up with Rs. 5.5 lakh at the end of 20 years. This is actually Rs. 1.2 lakh lower than you would earn if you invested by yourself. See the actual damage?

Now in a regular plan, you would end up paying a total of Rs. 49,250 in management fees over 20 years. In addition to this, Rs. 49,250 to your distributor. And because there's even lesser left compared to above for compounding, you would end up with Rs. 4.5 lakh at the end of 20 years. That's a full Rs. 2.2 lakh lesser than investing by yourself, and Rs. 1 lakh lesser than investing in a direct mutual fund.

Now here's something for you to think about - Is the advice you're getting from your distributor really worth Rs. 1 lakh over a 20 year period? Remember, Rs. 1 lakh is also the amount that you're actually investing right now!

Get the tumor analogy? You have to really dig deep, dissect things and put things in perspective to see how much damage is being caused to you because of the seemingly low 1% or 2% that you're being charged on an annual basis.

We are a fiduciary at heart. And because of this fundamental principle, we believe in transparency, bringing investment services to users at a cost that is not damaging, and putting investor needs before anyone else's, even our own!

What this translates into is a very simple pricing plan for our portfolios. Take the Rupeeting Core Portfolios :

  • Rs. 1,000 for 1 month

  • Rs. 2,000 for 3 months

  • Rs. 3,000 for 6 months

This is applicable on the portfolios we construct and manage for you, regardless of how much you wish to invest! Since our portfolios are made up of a bunch of ETFs, the underlying instrument will have a cost, which is also minimal (0.05-0.5%)!

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