Some days back I was reading an article in Livemint with the same title, where Monika halan, editor of mint money has written very strikingly that where we are so obsessed with getting a best price whenever we go for shopping, at the same time we tend to ignore costs when it comes to investing products.
Be it Direct stocks, Mutual funds, Insurance policies or real estate, we just look at what we invest and what we get at the time of sale. And the difference is what we’ve gained or lost. We don’t ask or count how much we have to pay for it, in terms of product expenses.
Product expenses along with taxation are one of the main factors affecting returns. Simply put higher expenses will surely be a burden on products’ overall return.
This article is about the costs attached to different products, so you can figure out the actual amount you are paying for investing or maintaining same. By comparing the returns you generate you can easily figure out the worth of paying such costs.
There are different investment products, some work as a structure and are being managed professionally and some are direct asset classes where there’s no management attached. Some are regulated too. So costs differ between these.
Let’s start with Mutual funds first
You don’t invest “in” Mutual funds, but “through” Mutual funds. This is a vehicle which makes you invest in different asset classes being managed by professionals. As you don’t directly manage the investments, so you have to pay the intermediaries involved and also other legal costs attached.
As Mutual funds are regulated by SEBI, you will find transparency in the cost structure. Besides the total cost structure has also been consolidated and capped by regulator so it becomes easy for investor to understand what exactly he’s paying for this product.
The expense structure of Mutual funds, depend on the Assets under management of Particular scheme and also the asset class where the investment will go.
Service tax on management fee will be levied in addition to the above limits.
Earlier there was a cap on the management fee, which is the part of over all expenses, but now SEBI has given a free hand to the AMCs to allocate the total expenses with in the limit specified above.
In addition to the above, a proportionate charge is levied in respect of sales beyond T-15 cities, subject to maximum of 30 bps (0.30%) on daily net assets.
There are different expenses that AMCs has to bear like Audit charges, Custodian charges, Registrar and Transfer agent charges, Printing postage charges, Management Fee, Distribution charges etc. All these charges will have to be managed between the above mentioned limits.
You can get the exact total expense ratio of a particular scheme from various mediums like Fund fact sheet, Scheme documents, Research websites, fund house website etc.
The other product which almost every investor has is Insurance policy, which many also call as Investments.
These Investment linked Insurance policies comes in 2 avatars – ULIP (Unit Linked Insurance Plans) and Endowment schemes.
Endowment schemes have opaque charge structure. There’s no document which details what the scheme is charging. You just can have an idea about the costs from Illustration that’s shared by the agent. To make you not notice the cost associated, agent always try to put before the expected interim bonus or maturity bonus, which actually is dependent on the company’s profitability.
Having a strict Investment allocation criteria and to provide the much desired security to the investors, endowment insurance schemes invest in debt instruments. With expenses like Agent’s commission ( which are quite high), Mortality charges which increases with age, undisclosed administration and fund management expenses and having invested in a fixed return instrument, you should not expect much in return. In my experience these products generates around 5-6% of return, which is way below the inflation rates.
In case of ULIPs which are way transparent product as compared to its counterpart, the cost heads are almost same. It also charges through Allocation expenses, Administration and fund management expenses and of course the Insurance Mortality charges. These charges vary from company to company and product to product, are detailed in the product brochure and well presented in the policy illustration.
The Third product which we’ll talk about is Real estate. Now this technically is not a product but an Asset class, which has to be purchased directly so all related costs has also to be paid directly. This is the much sought after asset class, having one in the portfolio gives a natural high to investor.
Where in the regulated products like Mutual funds and Insurance policies, the cost is inbuilt and you can figure out the net return after all costs attached, in case of Unregulated segment like Real estate all costs have to be paid directly and nothing is inbuilt. So to get the net returns which one has generated one has to account for all these expenses separately.
Different charges/costs associated with real estate is Stamp duty and Registration costs which varies from state to stage and generally in range of 3%-8%, Service tax and VAT are applicable in case of under constructed property . Besides the legal charges, the various other costs associated which increases the buying cost of property are Preferential Location charges (PLC), External Development Charges (EDC), Club charges, Infrastructure development charges(IDC). Unlike earlier, these days builders add these costs in the total purchase price and promotes project as “with no other Charges”. But when you talk to the person in detail, then surely you will be able to negotiate on these charges front.
Some other costs which are generally ignored by property buyers are the Interest charges (if property bought on home loan), Municipality charges (like for Meter connections, house tax etc.), maintenance cost, property visit cost, Insurance charges, care taker cost (if any).
Now after understanding the charge associated with various products and Asset classes, if you want to know the kind of return a product has delivered in the past, there are ready data available in case of Mutual funds through research websites or even Mutual funds own website, but in case of Real estate, you will get only stories. As far as data is concerned, this is the only data which is readily available . This data tells the prices at which properties are getting transacted and does not include the “over or under the table amount”.
You should know, how much you are paying to get what. Though you can’t be sure of what will you get as it all depends on the investment allocation you have and depends on the market performance, but what you need to be sure of the justification towards the expenses you are paying in comparison to other products.
Though Cost is not the only parameter you should look at while investing money, but still it should also not be ignored.