Home / Opinion / Online-views /  Difference between 1.25% and 2.25% in cost can be in lakhs
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Two years ago when the team at Mint Money created Mint50 (the latest listing here: http://goo.gl/23Qon) our aim was to pick out investment-worthy funds from a large pool of over 2,000 funds. The usual processes of getting a robust methodology in place (you can read it here: http://goo.gl/guZtN) and getting a good data vendor (we use Value Research data) were followed. But the final question we ask ourselves as each fund filters through is this: Would we put our money in it? And yes, we do. We buy out of Mint50 and yes, the portfolios have done well. Eating your own cooking is an important indicator of how committed you are to what you do. In an earlier job at another newspaper, I remember getting reporters to get the investment behaviour of some chiefs of the financial sector. I also remember being surprised. It was fixed deposits (this is about 10 years ago) and endowment plans for the 50-plus heads and the under-50 had real estate for investment and term insurance as life cover. Clearly the chiefs of the financial sector were selling stuff they were not buying themselves.

Taking that thought further, it may be of use for users of Mint50 to see what we are internally looking at now. We think that expenses will be the next big focus area over the next few years as Securities and Exchange Board of India’s (Sebi) new rules on hiking the limits of the expense ratio kick in. Some early trends are visible already. Most equity and hybrid funds have added the 20 basis points (bps) hike that has been allowed to compensate for crediting exit loads to the scheme and most funds plan to charge the 30 bps allowed for geographical reach. Service tax too will get passed on. However, the maverick of the industry Quantum Mutual Fund is holding the priceline. A tiny eight-scheme fund house that manages 225 crore (it would take 435 Quantums to reach the size of an HDFC Mutual Fund) has prided itself on being investor-oriented from inception. The 29th fund house in the country, Quantum took the radical step of cutting out the commission-driven agents in 2006 and offered products directly to the investors, three years before the Sebi made all funds walk the same path. At an expense ratio of 1.25%, its flagship fund Quantum Long Term Equity (it is a part of Mint50’s large and mid-cap category) is already the cheapest managed fund in the industry, with others in the same category in Mint50 ranging in cost from 1.45% to 2.35%. Quantum last week announced that it would not pass on the three new costs to the investors, but will absorb them, putting it miles ahead in cost advantage.

Are we obsessing too early on about costs and do they really make that much of a difference? They don’t for the short-term mutual fund investor who enters and exists with each cycle of a market rise and fall. But for a long-term corpus-building investor, it does with several zeros attached. Assume a person invests 5 lakh a year (the numbers will be understated because a real investor will keep hiking the systematic investment plan amount as his salary grows year on year) that grows at 12% a year will get an effective post-cost return of 10.75% in a fund that charges 1.25% (as Quantum Long Term Equity does) and 9.75% in a fund that builds in some of the new costs. In 10 years the return difference will be almost 4 lakh in the two funds, in 15 years this difference is 12 lakh and in 20, it is 33 lakh more. Costs will begin to matter a whole lot for people as the portfolio gathers meat.

End note: Asia Insurance Review data, quoted in a Tower Watson report titled India’s Online Insurance Market, says that an online term plan is bought every 18 minutes in India and that online costs are 40-60% cheaper and has an average death benefit that is eight times the average sold through other channels. This vindicates a long standing view I have. And that is: if the concept, use and function of life insurance are explained properly, the principal breadwinner of a household will queue up to buy the product. The sheer utility of a low-cost means to protect your family from an untimely death is unbeatable. But this key function gets buried in trying to sell an investment product that also has insurance. Life insurance worldwide justifies prohibitive agent commissions to the effort it takes to sell life insurance. Sure, the effort is needed because they are selling the wrong product. Bundling investment with insurance takes away the key attribute of an insurance product—it is like trying to convince a person to buy a flat screen television that comes embedded in a car. Look after the customer and the customer will keep walking to you.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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