Investing cost in India
I have written a lot of obituaries for the Indian mutual fund industry….let us see what an American Investor pays for investing in a mutual fund.
Most American investors go through a Broker-Dealer or a financial planner who acts as a B-D. Forget the myth of a fee-based financial planner – he is as difficult to find as Santa Claus. Perhaps he is accessible only for a minimum fee of $ 5000!
So first he goes and puts his money in a Wrap account with a broker dealer. The B-D then charges him a 5.75% ENTRY LOAD and a 1-3%p.a. as management fee. Then the money gets invested in a mutual fund which charges him about 1% (all right even as low as 0.76%p.a.) as asset management charges. This is true even if it is a debt fund. GOD BLESS THE AVERAGE American!
The day the Indian asset management companies decide to go the USA and offer asset management services at our costs – we can beat them hollow.
The amount of vested interests in the US financial system is soooooo deeeeeeeeeepppppp that there cannot be anything cheap in the US. Hey Obama forget Medical reforms, first reform your financial services sector. Just open it our Gujjus, Chettiars and Marwaris – and soon they will be dominating it like they are dominating the steel industry. God bless.
Dr Mohammed Ali Khan
God willing!!
Param
Subra,
Why look at the worst in US? Why not look at Vanguard – with 0 entry load, 0.1% mgmt fee for index fund, they are the true “mutual” fund.
subra
Vanguard like Goldman Sachs has excellent PR skills :). There is a lot of long term under-performance compared to many well managed funds. Vanguard is the old concept of a Co-operative society (you will know if you are from Mumbai). Co-ops got people together to buy land from Maharashtra government and constructed houses, co-op banks were a great hit and coops were a great success in sugar. V P Naik, YB Chavan..were the then CM of Maharashtra when this got a fillip. It is a Gandhian concept which worked. Imagine if 10 million Indians create a mutual fund and a life insurance company – if the premium is high, the shareholder is happy, if the dividends are high, the insured can buy some more share. In UK they were called Mutuals. Standard LIfe Mutual, …is an example. Good thought difficult to implement.
Srikanth
Why look at Vanguard which is a mutual fund company? Look at Schwab.com
I had an account with them – you have hundreds of funds from several mutual fund companies to choose from all at ZERO entry load (SchwabOne funds). Go through ETrade – you again have hundreds of mutual funds to choose from in several sectors with no entry loads. Management fees are typically not more than 1.5%.
These stats are from personal, verifiable experiences. I have several thousands of dollars still invested in a variety of US mutual funds.
subra
sorry stand corrected, Standard life WAS a mutual company – listing and being mutual creates some issues….principles remain the same. If the shareholder interest and the policy holder interest can be somehow made to converge, it would be a good idea.
Very difficult to run a mutual fund in India (well impossible) with just 1% asset management charges (all the others are reimbursement of expenses) unless you are a pure index fund / e t f, willing to spend lots on technology and hoping that people will come and buy. I think to break even you will require Rs. 200,000 crore to make some money, if at all. And will have to compete with NPS (2)
Param
Subra,
Sorry, I’m just too much of a Bogle fan. Vanguard Index fund is the largest and cheapest – they themselves claim that managed funds may underperform. The best part is that even their managed funds are managed by other Inv Mgmt companies who need to submit a bid to manage the fund – this allows the fund to negotiate with amc – something impossible in indian context considering the conflict of interest.
I have a simple solution. Let someone be allowed to setup the mutual fund (for not manage the investment) – the person/firm will be allowed to charge reasonable expenses (on actuals) for managing the fund (if investors think the charges are too high, they can take the money out). They will negotiate with RTA for best deal for investors, also negotiate with AMC for best deal for investors – all within the limits of SEBI. I’m sure such a deal will be in favor of investors. This would be closest we can get to Vanguard.
Regards, Param
subra
Also a Bogle fan, but did not like his latest book ‘Enough’. Indian philosophy far superior. Benchmark is the closest to cheap mutual funds we can see in India. Benchmark has to recruit people in this market, keep a cramped office in Nariman Point, fight for mind space of the distributor – not easy. I was surprised to find damn decent cotton pants in Westside for Rs. 600 – when I went to the counter he said ‘sir there is one FREE PANT also – so my cost is Rs. 300. Surely this is crushing the value chain yielding results. So if a HUGE bank (SBI?) were to launch an index fund…let us dream. Or will it be Ratan Tata doing a Nano on the MF industry? Fingers crossed. As on today Prashant, Naren, Sukumar…are doing a good job, am happy paying them 1% fees.
Puneet Gupta
Yes. God bless.
As I understand, in India, in reality, no MF can attract investors without huge expenditure on advertisements. This adds up to the fund house charges.
So a low cost pure index fund, might just be a myth.
http://imposters.blogspot.com/2010/05/simplest-portfolio-idea.html