The answer is obvious- each rupee that a mutual fund incurs as cost, reduces your returns by an equal amount. This is not to say that the mutual fund which has the lowest costs is always better. It just indicates how significant it is for an investor to clearly understand mutual fund costs.
On the face of it, a mere 1% difference in costs may not seem significant, as long as the returns look attractive. Though, even a seemingly minor 1 per cent difference in cost is significant in the long run, as in the following example.
Consider an investment of Rs.10, 000 in two funds giving the same returns. The net return after accounting for the costs shows a substantial difference.
|
Returns (%) |
Costs (%) |
Net return (%) |
Rs.10000 after
10 yrs 20 yrs |
||
|
Fund A |
15 |
2 |
13 |
Rs.33945 |
Rs.1,15230 |
|
Fund B |
15 |
1 |
14 |
Rs.37072 |
Rs.1.37435 |
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