Having discussed the various costs and expenses involved while investing in a mutual fund scheme, let’s now find out if they really matter. To understand this better, we shall compare two mutual fund schemes, one with a low cost structure (say Fund A) and the other which isn’t quite as charitable (say Fund B). Investments in Fund A attract an entry load of 1.0%, while the number is 2.5% for Fund B. Similarly, the recurring expenses are 1.5% and 2.5% for fund A and fund B respectively. Assume that Rs 100,000 (one-time investment) is invested in each fund for a 10-Yr period and that both the investments grow at 15.0% per annum.
Fund A vs............... Fund B
................................Fund A ........Fund B
...........Entry load................ 1.00% ............2.50%
Recurring expenses............ 1.50% ..............2.50%
Amount invested ........(Rs) 100,000.......100,000
Growth rate (per annum)...... 15.00% ............15.00%
Maturity amount 10 yr (Rs) ...344,331 ........306,217
On maturity (i.e. at the end of 10 years), the investment in fund A would be worth Rs 344, 331, while that in fund B would be worth Rs 306, 217. The differential can be traced to Fund A’s cost effectiveness.
While evaluating a mutual fund scheme, factors like the AMC’s investment philosophy and style, track record across parameters (risk and return) are usually given due weightage. To that list, investors would do well to add the fund’s cost efficiency. After all, as we have observed, over the long-term the costs involved can have a significant impact on the fund’s performance.
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