The Easy Way to Earn Higher Returns in Mutual Fund Investing
In the quest to find the potential investment options, a key component associated with investing is often ignored - cost. John Bogle once said - "Success in investing involves focus on two things - cost and discipline". While high costs may not be a bad thing, ignoring it completely can hurt investor returns in the long-run. Focusing on saving costs can help investors earn higher returns in mutual funds.
The importance of cost in investing to earn higher returns
Cost is the amount of money an investor pays to buy a financial product. In the mutual fund industry - there are two types of costs. One is fund level costs called direct expense Ratio, and the other is the amount that is passed on to the distributor. TER (Total expense ratio) is the combination of both of these costs.
Consider the following scenario.
You invest in Rs. 1,00,000 in a regular mutual fund. Let's assume that your investment generates a healthy 12% a year for the next 25 years. Factoring in compounding, you should end up with about Rs. 17 Lakhs.
Now, active mutual funds typically have an expense of 2%. At this rate, annually, you only make Rs. 10.83 lakhs after 25 years. This is because the interest that you earned remains only (12 - 2)% = 10%
The costs eat up about Rs. 6.17 lakhs!
Let's analyze this deeply.
- Compound effect
The compounding effect in your portfolio is a wonderful thing. Still, many investors tend to miss out on the compounding of costs. A cost of 2% might seem negligible at first glance, but the amount that it expands over the years can be eye-popping. You might have viewed 2% at meager Rs. 2,000 when investing in Rs. 1,00,000. But in the end, the cost you pay is upwards of Rs 6 lakhs.
- Lower priced options available too
Most investors may not realize, but markets offer lower-cost funds, such as index funds. Index funds being 40-60% cheaper than other available funds - make choice selection easy while keeping cost low.
Where to begin?
Index funds offer excellent opportunities for investors wishing to lower their investment fees every year. This can help you earn higher returns from your mutual funds.
Even the likes of Warren Buffett loves the idea of adding index funds to the portfolio. The serial investor recommends investing in a low cost S&P 500 index fund.
Index funds are slowly gaining popularity in India too. The cost of passive investment products is lower than their active counterparts since they do not demand constant time and attention. They form a sizable part of the passive investment world.
At Glide Invest, we are a team committed to helping you pick great low-investment products to achieve financial freedom and long-term wealth. Head over to the Glide Invest website to know more.