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| Stuck on cost? Look beyond |
| Arnav Pandya / Jul 18, 2010, 00:01 IST |
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One of the many ways in which investors evaluate options is by looking at the costs involved. The investor is in a better position to buy when the cost for to be incurred is low. While there is no doubt that a lower cost is better for the buyer, what is also important is that they also look at other angles to ensure a better selection.
If there is a comparison between two options that invest in a similar asset class and one charges 23 per cent, while the other asks for 3 per cent. This is evidently a huge difference is charges and could be the main reason in decision making. In many other cases, the difference may not be very significant in terms of cost. A majority of investment choices will fall into such a category. For example, with options where one has a cost of 2.43 per cent and the other 2.12 per cent, basing your decision just on the lower cost component may not be enough.
RETURNS MATTER
The return generated by any investment product is important in choosing an options. Here, the difference can be significant. For instance, the difference between funds (large-, mid- or small-cap or sectors) in the same category can easily go up to 35-40 per cent a year. This can make a huge difference to the final amount you earn.
So, looking at a 0.2 or 0.3 per cent difference in cost when the return varies by 10-20 per cent would be foolish. In such cases, the ability of the fund to actually keep performing better than peers is important. And paying slightly more for it should not be such a big issue.
LIMITS ON INVESTMENT
The other factor is the limit set by regulatory authorities for a particular investment option. The investor has to check these and know what it is with an understanding of why it is set so. Then look at the features and returns given.
For example, you should not be content with just 1 per cent annual cost to an investment in safe instruments that will generate 6 per cent, when the need is to earn 12 per cent. One might have to pay more for a higher return.
At the same time, you have to figure out how to ensure similar exposure in the market through various alternatives but at a lower cost. So, instead of a balanced fund, one may want to invest directly into bonds and equities to meet the requirement.
NEED-BASED SELECTION
Beyond just cost and return, the decision must also help select an option meeting your goals. So, if you want capital protection at all costs, select an option addressing that need even if it costs higher than one where there could be a chance of losing money.
Or, there could be a need to have a liquid investment accessible anytime . Here, both returns and cost can be sacrificed to ensure that your investment is instruments which costs higher, not give very high returns but is liquid or gives money when required. Ensure the right mix of factors before arriving at a conclusion.
The writer is a certified financial planner
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