Too many people in the media are obsessed about fund management costs. This is not a bad thing – after all this is the ONLY thing to which we retail investors have access, right.
Fund managers on the other hand (ok the 3-4 fund managers who I have spoken with and who have over the past decade + have beaten the sensex) feel it is not so.
I am torn between the 2 schools. I know one corrupt fund manager can ruin a fund performance – and all the kings men and kings horses cannot put Humpty Dumpty together again. Many of us know about a fund manager who was very bookish – and ended up with a lot of shit in his portfolio. Poor chap believed the balance sheet and trusted the management. Now of course he is well improved and runs a very successful scheme.
I would agree with ‘cost is the only thing which matters’ school of thought ONLY if it is an index fund. The NPS for example is an index fund – the equity money goes into an index, but the DEBT portion goes into a bond fund. The bond fund could be G sec or Corporate. There is no index bond fund in India. Also there is no Dynamic Index (oops!). If you are observing the UK and US markets you would have watched the NEGATIVE returns on their bond funds. Why? Because interest rates have gone up SIGNIFICANTLY – FROM 1.5 to 2 %. This is huge – it is a 33% jump in rates. If the interest rates go up even further, the bond funds will post HUGE losses (last year the longer term bond fund lost about 7% in London). Now combine this with a 5% FALL in equity markets, your NPS will show a fall of 12% – IMPOSSIBLE for the common man to take. He is used to a 8.78% return on his PPF…
So fund costs is excellent to monitor ONLY AND ONLY if
– you are sure of the competence of the fund manager
– integrity of the fund manager and his bosses
-processes of the fund house is nice and clean
I, personally, will stay away from NPS. However my answer may be very different if I am an employee and my employer offers me a matching contribution.
My returns double, right? Wrong, it goes up MUCH more…power of compounding.
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