When we invest in a product or asset, we always in an assumption that the past returns shown to us are in reality OURS. However, the reality or hard truth is entirely different.
No matter wherever you invest, there are certain costs involved. However, as investors, we hardly give importance to such costs. Hence, the end result may be different than the rosy picture shown to us while we are investing.
Few days back I tweeted as –
Sounds true…But we never understand the concept of COST while we are investing. Before you jump into investing in any asset or product, the first important homework you must do is the COST involved in investing in such assets or products.
Let us take an example of Mutual Funds. We always assume that the cost is adjusted to NAV. Hence, whatever the returns they are showing to us are REAL. However, compare the same fund with direct options. You may end up with a different story. I am not here to compare direct or regular funds. In the end, it is your choice to go ahead. However, the point I am trying to make is COST is the LEAST important aspect many investors give.
Let me list down the costs involved if someone is investing in mutual funds.
All costs are NOT BAD!!
When I listed the above cost, there are few costs that we can’t avoid and there are few costs that add value to your investment. Hence, generalizing all the costs as BAD is a wrong concept. Hene, let me list few categories of costs.
# Unavoidable costs
By choosing direct funds and within the direct funds if you opted for passive funds, you still end up with some costs. As nothing is free, such costs are part and parcel of your investments.
At the same time, you can’t avoid taxation fully and also inflation. Hence, such costs are part and parcel of investment.
# Avoidable costs
You can lower your costs of investing by choosing direct funds or passive funds. At the same time, as few use tax harvesting activity, you can lower your tax liability (however, I personally feel it is a futile exercise).
# Value Adding costs
As an investor, we are not so much equipped to understand the nitty-gritty of the financial world. Hence, to a certain extent, a kind of handholding is required. At the same time, the investment journey per me is full of behavior aspects rather than calculation aspects. Hence, if someone (whether he is a distributor or a fee-only planner like me) is guiding you in your journey, then obviously such costs are a valuable addition to you.
However, if you are unable to find any value addition in such costs, then they may be the biggest liabilities of your investment journey.
But I am a strong believer of DIY. Hence, my suggestion is to be associated with such middlemen until you streamline your investment, know the way to manage, and then say GOODBYE to middlemen.
# Value destroying costs
Costs like subscribing blindly to some groups where they will bombard with a lot of NOISE, choosing regular funds, and spending a lot of time on investing are few of the costs which we can consider as destroyers.
Conclusion – After considering all the above-listed costs (you can add few more if you come to know than what I have listed), whatever is left is YOURS!!
