Do expense ratios matter?
Hindu Business Line carried an article by Aarti by the same title. She starts by saying it is blasphemous to even ask this question. I agree that it is the way the media has ‘asked’ people to think.
However, I belong to an old school of thought. It is easy to say ‘costs are everything’. Have you seen it in the concept of mutual funds?
The fund which was supposed to be the cheapest (lowest amc charges) is languishing at the BOTTOM.
It is all about fund management. If I were the shareholder of a company which was paying me 50% dividend and my Rs. 20,000 investment had become Rs. 34,00,000 in 20 years, will I be bothered about the CEO getting a salary of Rs. 5 crores? Hell no.
However if I had invested, got no returns, share was quoting below issue price, …and the MD wanted a salary of say 5 crores, I WOULD SCREAM.
Similarly I know fund managers on ZERO remuneration, just 20% of the profits (client to bear all the loss, but for remuneration purposes, the losses will have to be set off, before he gets his % age of profits)….such deals are not unknown. In a country where there are so many fund managers of dubious quality such well defined short term contracts will survive….hopefully!
Sanjay Singhaniya
fund managers on ZERO remuneration, just 20% of the profits.
What if such fund manager decides to misuse the fund by investing in dubious companies to increase share price so that promoter of such companies get a lot of money by selling shares.
Such scenario is possible with fund manager with non-zero renumeration as well. But when fund manager knows that he has nothing to lose (he already has zero renumeration) by investing money in risky assets then he will be tempted to do it.
It is just a thought from my side. I am novice and do not know full details of how such contracts work.
Banyan Financial Advisors
Subra,
You have raised a very valid point. Unfortunately people want free lunches. Cost benefit analysis is not performed while looking into for investment options. At the max what a person can do while shopping around for a fund house is to go for a fund which has the low expense ratio. The trick often lies in the size of the fund. Generally speaking, larger the fund, lower are its expense ratios. I have explained the reason in my article at banyanfa.com
On another note, I would also strongly refrain from going with fund managers who charge percentage fees – dont you feel the same ?