Sorry the title is a little misleading..but there is the text.
In life we buy many products – food, clothes, entertainment, investments, …etc. etc. Let us assume that we buy about 100 items. Out of this we understand the price of about 5 items. These are simple items which we can make at home. Say a Masala Dosa. So when you go to a hotel and eat a masala dosa you are stunned at the price – say Rs. 100 in an a/c udipi hotel and about Rs. 750 in a 5* hotel.
No, you cannot do anything, but you can choose not to eat at a 5* hotel, if you do not fancy paying such a huge price. You can go to a non ac udipi joint and eat for Rs. 45.
However, for the more sophisticated items like say an Apple Iphone 6, you just have no chance of working out the cost, margin, etc. and you are willing to pay say US $ 1000. That is about Rs. 66,000 and you have no clue with what to compare this. Also you are sure that the higher the price that you pay, the better is the quality, so, if the price goes up, more people will buy!! When you see the cash in the Apple balance sheet you realize that the mark up is vulgar – but hey I am not complaining.
Now let us come to direct equity trading. There are a lot of costs involved. Opening a demat account, brokerage, and other incidental costs, taxes, etc. What hurts in direct equity transactions is not the brokerage, it is the frequency of trading – i.e. churning. Obviously it is too complicated for the regulator to understand so he does NOTHING about it. I have seen portfolios where the brokerage paid is more than the profit earned. So it is a funny situation of the client taking the risk, and the broker earning the brokerage.
In case of mutual funds the cost that is visible of course is the asset management costs. There are many people who believe that the fund that charges the minimum is the best fund. I have some very strong views on this. A well managed fund – I still go by the fact that each fund manager brings uniqueness to each scheme – deserves the costs that a fund manager charges. Of course this is a matter of individual choice. Similarly an IFA who can explain the difference between Hdfc prudence fund and Hdfc balanced fund or an IFA who can explain the difference between a fixed deposit and an income fund, or clubbing, or why a 4 year FD for a 14 year old, ….is worth the fee paid. I know it is fashionable to chase costs, and I also know of value adding fund managers!
How does an ordinary investor reconcile between the two? Simple bring investor and adviser interests in alignment. That is all.
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