Saturday, November 15, 2008

Cost of Investing

The most common parameter for investors to evaluate their mutual fund investments is "returns". However, the other important aspect to be taken into consideration is the costs involved in investing in mutual funds. Investing in MFs involves bearing of certain costs on the investor's part, which in turn, have an impact on the ruturns clocked by the investor. They are one of the reasons, why some good performing funds also end up with sub-par performance.

The costs that can be associated with MFs are:

· Loads

Load is the price paid over and above the fund's NAV at the time of buying or selling of units. MFs mainly charge loads because of two reasons – to meet their expenses and to discourage investors from exiting. Loads are of two kinds.

Ø Entry –Load

This is the amount paid at the time of purchase of the fund. Entry loads are mainly charged to meet the expenses of entering the markets and also to keep away the speculators and short term players. In case of entry load, the sale price of the fund can be calculated as:

Sale price = Applicable NAV * (1+ entry load)

Ø Exit Load

This is the amount at the time of sale of the fund. Exit-load is mainly levied to discourage early withdrawals; as too many early withdrawals can sometimes put redemption pressure on the funds. In case of an exit-load, the repurchase price of the fund can be calculated as:

Repurchase price = Applicable NAV * (1- entry load)

· Marketing Fees

Some funds deduct the costs of advertising and marketing the fund directly from the fund's assets rather than absorbing them in the management costs. A portion of that fee may also be paid to the broker who sold the fund. It is the cost associated with the advertising, marketing and distribution of the fund.

· Management Fees

All funds, irrespective of being a load fund or a no-load fund, must charge a management fee to compensate the portfolio, managers for their services, pay brokerage commissions on portfolio transactions, and so forth.

The best tool of measuring the amount that the investor has to bear as expenses with respect to the returns he earn on his investments is the Expense Ratio.


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