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Mutual Fund Commissions Will Drain Your Expected Returns

It is time to get real about mutual fund commissions. At 1% or more, add the upfront trail commissions, the cost is too high and needlessly gives away most of your expected  gains. You must consider your gains in real, after-inflation returns. If your investment doesn’t grow more than inflation then you are losing money!

Fees should be a consideration for investors, especially in today’s low-rate, low-return, fixed rate investment environment, but they should not be the only factor used to determine whether to use a particular adviser or financial product.Management and Fund fees (or Expense Ratio) are fees that mutual funds automatically deduct from your investment on a daily basis to cover their costs. These include expenses for fund management, advertising, administration, and for paying sales commissions to distributors.

Research from global markets has shown time and again that funds with low expense ratios tend to give better long-term returns than funds with high expense ratios. This isn’t rocket science – cheaper funds that shave away less from your portfolio value will obviously be more likely to outperform expensive funds. This does not mean that costs are the only factor that determines returns, but over the long run it turns out to be one of the most important ones so it is worth keeping this in mind when picking funds.

The world is entering a phase of moderate growth. Already markets are considered overvalued. If a growth of 10% is projected for an equity mutual fund, then please remember that this is before all sorts of fees and taxes. [See an illustration]

Conclusion :

The best way out of this is to select a direct mutual fund that charges low fees. The long term wealth generating portfolios that we review are usually low cost and simple. So, keep it simple and get real about commissions.

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Ram Kalyan Medury

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