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Like Taxes and Death, for Investors "Management Fees" is something that cannot be avoided. But Fees not only deters investors but actually destroys a large part of capital gains when investments are held for a very long period.
Mutual Funds charge a % fee on assets they manage on your behalf - if you invested through a Distributor, this comes to around 2% per year. If you invested on your own, its still around 1% to 1.25% per year.
A way to reduce the fees is to invest in ETF's which charge a much lower fee owing to fact that the stock selection and the weights are decided by a Index with the fund having to only mimic the same.
Does that mean that investors should ignore Mutual Funds and invest only in ETF's? While you save on fees, what is the negative of being in ETF's only?
The good thing about ETF's are that they are taxed as if they were any Stock or Mutual Fund. So, if you are aiming for Market Exposure, Tax wise, it makes no difference when you exit.
But investing is more than Market Exposure. Its about controlling Risk and enabling Returns. Since ETF's are exposed 100% to markets, they are also exposed to 100% of the Risks.
Mutual Funds here can be a differentiator by building portfolio's that aren't mimicking the index they track. But when they don't have a closet portfolio, they also run the risk of under-performing during periods of time (such as now).
Quantum Mutual Fund's Long Term Value Fund for example tracks BSE Sensex TRI and yet doesn't have either HDFC Bank or Reliance in their Portfolio. The result is massive under-performance in the short to medium term.
But if a fund took a higher Risk by buying more HDFC Bank for example and out-performed, does it deserve a Star and a High Fee?
Wanted to talk about Fees, Alternatives and Objectives. Somewhere lost the train of thoughts. Shall revisit some time later.
