Avoid Mutual Funds with Hidden Costs
Avoid Mutual Funds with Hidden Costs and increase the chances of earning index-beating returns.
We all are quite familiar about mutual fund expense ratio and we rightly desire that it reduces as much as possible. Recent circular of SEBI have furthered lowered the cap on mutual fund charges in a regular plan. Growing popularity of Direct Plans further catalysed by PayTM’s entry into selling mutual funds is a testimony to the importance of costs when investing through mutual funds.
But how many of us realize that there are costs which are not visible in the expense ratio that impact the returns that we earn in Mutual Funds?
What are these ‘hidden cost’?
Brokerages and Impact cost!
Yes. Just like us, funds have to pay brokerage when buying and selling a stock. Brokerages are not reported separately but the NAV is calculated after deducting the brokerage fees. SEBI has a cap on brokerage charges of 0.12% on every transaction for mutual funds. So if a fund buys and sells, it has to pay these charges that get deducted from our corpus. Obviously, we can’t avoid these fees but can the fund reduce it? But how to determine how much brokerage a fund may has paid? The shortcut to check this is by looking at Turnover Ratio of a fund which is available in the factsheet. This factsheet is published monthly. Alternatively, you can also check this on MoneyWorks4me.com website.
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