Mutual funds may soon be available to the end customer directly. When you go direct, you avoid the sales costs….that is all. You still pay asset management charges – and as of now we have no clue how much. So lets do a look see…..

The other costs remain the same….now let us see what a 2.8% per annum cost does to your money over a 30 year period. (lets accept that you will remain invested in SOME fund or the other and the charges will be the same).

Well this is what is likely to happen to your fund:

Assumptions: Amount invested Rs. 10,00,000

Period of investment: 31 years

Market return: 15% p.a. CAGR, growth option – so the dividends have not been paid out to you, your only return is the CAP GAINS.

WELL, your money would have grown to Rs. 3,15,70,922. Wow not bad you have created a tidy sum of money, right? yes.

Maybe this could play an important part of your retirement corpus. Now let us look at what the asset management company made for ‘helping’ you to achieve this nice round sum.

Well they made about Rs. 83,56,398. Again not bad, especially if you are the asset management company / distributor combine…it can also be part of somebody’s retirement corpus, right?

Well what would have happened if you had invested in a mutual fund which charged say 0.5% amc? well well, the corpus would have been

Corpus amount: 6,51,85,133

Amc charges paid: 25,58,506.

Is this not slightly better than the previous model?

So if there was such a fund available you should be investing in that fund, right?

Well let us see if we can get a fund house which says ‘anyway it is an index fund so we will charge you a FLAT fee of Rs. 20,000 per annum, immaterial of corpus…then what happens?

Corpus:  Rs. 6,61, 24,399

Amc charges: Rs. 620,000 (easy it is not 20,000*31)

Well that is another Rs. 19L saved…hmm not bad is it not?

Will it happen? No. Can it happen? Never.

Why? simply because.

Once upon a time there were companies which needed money to do business. Then there were merchant bankers. Then mutual funds were created. Mutual funds required a regulator. The regulator said all people should be qualified. Then there were trainers, analysts, fund managers, distributors, auditors, trustees,….so the Rs. 83,56,000 that YOU PAY is to be given to all these people…

Sorry, this post is going to hurt tooooooooooooo many people, but as usual, will live with this.

I AM NOT SAYING that everybody should do direct investing…but recently did an exercise for a friend..and realised that for his corpus of about Rs. 20 crores he would have ended up paying about Rs. 2 crores over the past 7-8 years as amc charges and load…he said ‘i could have bought a flat in Ghatkopar’..well chuckle chuckle…