Smart investment: Keep an eye on the cost of investing

Retail investors need to understand the costs associated with investing, which will have a significant impact on returns. Higher paid expenses will reduce the amount of money invested in the scheme or instrument, lower the compound benefits and affect the overall value of the corpus in the long run.

Expenditure on mutual funds deducted from investments, direct payments such as brokerage, indirect expenses such as commission for life insurance and even churning of the portfolio can erode investors’ returns. Avoid paying late payment for insurance premium, systematic investment plans, public welfare fund and recurring deposits.

Sushil Jain, CEO, PersonalCFO.in, says that awareness of investment expenses is increasing as these have a huge impact on corpus in the long run. “Different investment costs can cost about 10% of the total body if you invest for 20 years,” he says.

Go for a direct investment fund plan, passive funds
For actively managed equity funds, the Total Expense Ratio (TER) is between 1.5 and 2.25% and for debt funds 1.25-2%. Direct plans have a lower cost ratio than regular plans, as there is no distributor / agent involved. The lower the cost percentage of a scheme, the higher the NAV. Therefore, TER is an important parameter in choosing investment fund scheme. If one invests through a bank registered as a distributor, he would invest in a regular plan with higher cost ratios and not a direct plan with lower cost ratios. However, if the bank is a registered investment adviser, the investment may be in the direct plan.

In the direct plan, the investor must understand the investment strategy and choose the fund himself, make KYC online and even go for online redemptions. The cost percentage is deducted from one’s investment and Net Asset Value (NAV) is published. Investors can choose passive funds if the fund manager of active funds is not able to generate at least 2% to 3% more returns than the passive funds.

Look Before You Buy Life Insurance
All traditional life insurance schemes come with high costs in the form of commission in the first years of coverage. Most life insurance companies pay 60% -75% of the first year premium and an additional 15% for each renewal as a commission. The commission is paid after deducting the premium and the rest is invested. As a result, traditional life insurance schemes provide a suboptimal return of around 5%. Even leaving a traditional life insurance policy will incur a large repurchase tax. For life insurance, the provider should choose a period plan that is cost effective and can take care of the family’s needs in case of any eventuality. Insurance companies offer discounts on online plans as they can save on commissions and other service costs.

Avoid rolling the portfolio
Each time an investor discards (buys or sells) his portfolio to save tax, the total return is affected as equity investments held for a longer period yield higher returns. Each time an investor discards the portfolio (either buy or sell), he pays a brokerage of 0.5-0.75% of the transaction value, excluding custody expenses and a transaction fee charged by the exchange. So an investor should look at the net return on the portfolio, rather than the tax outflow alone.

Brijesh Damodaran, managing partner, BellWether Associates LLP, says churning typically involves buying and selling at frequent intervals. “When you buy and sell, there can be an exit charge. Also, with every transaction (buy and sell), cost ratios based on the asset managed by the fund are included in the transaction costs. Short-term or long-term capital gains can also kick in based on the time horizon. ,” he says.

Jain says churning is not advisable at all, as the cost of churning is more than the net return expected to be generated. “Costs such as exit charges, capital gains tax and loss of the benefits of compounding will affect the reinvestment in the long run,” he says.

Leaky portfolio
For actively managed equity funds, the Total Expense Ratio (TER) is between 1.5 and 2.25% and for debt funds between 1.25 and 2%.

Most life insurance companies pay 60 to 75% of the first year premium and an additional 15% for each renewal as a commission
Termination of the portfolio leads to a brokerage of 0.5-0.75% of the transaction value except for custody expenses and a transaction fee charged by the stock exchange

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