Investors unknowingly define mutual fund fees with a four-letter word and a number, both of which are incorrect! The word is “only,” and the number is often “1%.” Whenever we see investors discussing mutual fund fees often the statement like, ‘it’s only 1%’ is heard. Most of the investors have this feeling that how this small 1% fee will make a difference in their returns. But, the fact is that they are unaware of the truth.
Today, we brought you this write-up to enhance your knowledge of mutual fund fees and how it makes a difference to your returns. Read until the end and know how a small change in your mutual fund fees can make a bigger difference.
Generally, the average mutual fund fee in India ranges from 0.5 % to 2.5 %. Yes, it seems a very small number, and still, it’s like only 0.5 % to 2.5 %. Really, what’s the big deal if I have to pay 1%, 2%, or 3%, as a fee on my mutual fund investments! It still sounds like a rather small and irrelevant number.
Well, fees are a big deal. The fact that the investment growth is exponential, i.e., compound growth, which makes the small penny turn to be a giant number over the period of time. Remember one of the famous sayings by Einstein that goes like “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Let’s Sketch it Out More Clearly:
Numbers like 1% are meaningless to most of the investors. So, let’s paint a scenario around it to grab a better understanding of this “fee.”
Suppose there are two investors, High-Fee Harry and Low-Fee Larry. Both of them hold investments in similar assets that have an annualised return of 15% (before deducting the fees). Harry’s investment portfolio manager typically charges him a fee of 3%. Whereas, Larry has an economical one who charges him 1%. Although, both Harry and Larry are gaining a return of 15% on their investments before accounting for fees, after considering the charges Harry ends up with a net annualised return of 12%, whereas Larry earns 14% on his investments. However, the difference is 2% only. You might be thinking again that, what’s the big deal? It actually is not a very big difference if the matter is for a year only or even a couple of years. But, when you extend the life of your investment, that is what obviously you do if you are planning to create wealth, the difference will become massive.
Let’s Decorate it More Realistically:
Suppose, both Harry and Larry have started their investments with Rs. 1,00,000 in their respective portfolio. Assuming it to be a lumpsum investment for a tenure of 40 years, let’s decode that what difference does a small number of 2% can make!!!
After 40 years, Harry would have grown his nest to Rs. 93,05,097.04 on his investment of Rs. 1,00,000 at a rate of returns 12% after deducting the managing fee. On the other hand, Larry, who paid less fee and earned interest at 14% has accumulated the wealth of Rs. 1,88,88,351.39 after 40 years on his investment of Rs. 1,00,000.
You can clearly see that only a difference of 2% in the fee can make a whopping contrast of Rs. 9583254.35, which is really massive. Just a difference of 2% helped the latter one to earn more than double of what the former one gained in the same period of time. Isn’t it shocking?
What Do You Say Now?
Do you still have the feeling that it’s only 1% or 2%? Do you still believe that it’s just a small number and it doesn’t put any significant contrast to your investments?
We definitely do not think that you will take it anymore as less important. However, the statements like “it’s only 2%” are commonplace. You can now understand that how misleading those statements are!
How Much Are You Paying?
If you are one of the investors who move along with the crowd, then you might have no idea that how much fee you are paying. Most of the uninformed investors have a ballpark idea that the fee typically ranges from 2-3% or something similar. Again, framing it into percentage form makes it more inexpressive. A small number like 1% does not depicts a very clear picture of fees than that of when it is translated to actual Rupees.
Therefore,get assured of how much you are actually paying to your fund manager as a fee. Don’t get mislead with small numbers because when you invest for a longer duration, the small number unfolds a massive change.