The interest that a deposit will fetch, or the expected appreciation in price of an equity share, or the returns expected from a mutual fund investment, are the first things that are considered while evaluating an investment. With all the discussions about risks, you may even consider the possibility of losing the money invested. However, most people do not consider the one certain aspect in the investment—the costs. Irrespective of the investment’s performance, the costs, fees and expenses linked to it have to be paid and that makes it a must-know before investing.
“When we construct a portfolio, we make choices among the products of banks, asset management companies, insurers and pension funds. In all the products, the stakeholders are the manufacturers, employees, distributors and consumers. Unfortunately, there are issues on the cost structure, expenses of management and fees charged to the customers,” said Prakash Praharaj, founder, MaxSecure Financial Planners.
The impact of these expenses on returns can be significant. For example, a difference of just 1% in the annual expenses charged to two investments earning the same return translates into a difference of close to 16% in the final value over a 20-year investment period. This difference goes up to over 20% if the holding period was 25 years. It is important, therefore, to look at the costs involved in making, holding and exiting an investment while evaluating options, and not merely the risks and returns. Expenses drag down returns earned on an investment, particularly in the long run because they take away a chunk, which is then not available to the investor to grow and add to the final corpus value.
