Avneet is a diligent investor who makes all his investment
decisions with utmost care. Of late, he has noticed that many costs
associated with investments are eating into his returns. Avneet wants to
know what are the costs he should be aware of and how he can avoid
losing money.
To start with,
Avneet must realise that considering the costs related to his
investments are integral to the decision making process. This is because
costs incurred as
fees
,
brokerage
and commissions eat into the final returns. Over the long term, this
can have a significant impact on the value of his investments.
He must remember that costs he bears include those where he makes a
direct payment and also those that are inbuilt into investments such as mutual fund expenses.
The other cost that is likely to be overlooked is the penalties imposed
on investments. Charges on delayed payments or early withdrawals from
investments also impact the returns.
He must not let the investments’ performance alone dictate his attitude to costs. What may seem like a small charge when investment returns are good may be a big drain when performance dips. Avneet must consider all the visible and invisible costs carefully and make sure they are justified before committing. Withdrawing later may be difficult and expensive.
High cost can be justified only if the investment is consistently generating much higher returns. Avneet can avoid penalties by automating the operational aspects and making sure that his portfolio has adequate provision for his liquidity needs so he does not have to exit an investment by paying high charges. Additionally, he must question every time he is adviced to sell an investment he is holding and invest in a new one, as churning also translates into higher costs.
Avneet must use service providers who link the fees to transactions and not charge an annual fee or flat fees. Flat charges work well only if the number of transactions are high enough to apportion the costs. Hence, being aware of the impact of costs on his investments and assessing the costs related to each investment before committing will ensure that his money works in his interest.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
(Disclaimer:
The opinions expressed in this column are that of the writer. The facts
and opinions expressed here do not reflect the views of
www.economictimes.com
.)
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