Mr. P, Mr. Q and Mr. R are friends. They decide to invest 100,000/- to grow their wealth long-term so they can retire peacefully. They choose 3 different Mutual Funds. For the purpose of this discussion, the investment vehicle could be anything – Mutual fund, market-linked Insurance scheme or a Portfolio management scheme, etc.
Let us say all the 3 funds give the same return of 12% p.a. in line with the stock markets. In India, the stock market has given a return of ~15% over a 20 year period. So 12% is a reasonable and conservative assumption.
If 100,000 were to grow at 12% on its own, it becomes a huge sum of ~Rs 17,00,000 in 25 years. 17 times original amount invested. Pretty good, huh?
The critical thing that 99% people do not know are fees involved in these products.The fees are of various types but for this example, assume – P’s fund manager charges 0.5% fees, Q’s fund charges 1.5% fees and R’s fund charges 2.5% fees. The fees are per annum.
Let us say all three wake up after 25 years when they need this money for their retirement.
What happened to their Rs 100,000 investment in these years?
After 25 years
P’s Pot of money 1,492,000
Q’s Pot of money 1,136,000
R’s pot of money 880,000
(figures are rounded off to thousands)
Yes, you rightly noticed that after 25 years, Mr. P is substantially richer than Mr. Q and not to speak of poor Mr. R!
P is 31% richer than Q,
P is 69% richer than R!
And you thought it was just a matter of paltry 1%! The typical attitude is – what difference could it really make?
Lessons from this example:
- Fees erode your wealth-creation big-time!
- The longer your investment horizon, the bigger the difference.
- Unlike this example of one-time investment of 100,000, people will save every year. So in practice, these numbers will be simply staggering!
- Most people are not aware of the real impact of fees on their investment return.
- Most people do not get good advice and end up choosing bad products.
The numbers don’t lie. Fees in products such as mutual funds and Insurance really erode your own wealth creation by a huge, huge amount if you don’t pay attention.
What to do?
Get a good advisor. Pay him a fee to guide you in choosing the best products. The advisors who earn commission are not necessarily on your side! Their interest is first their commission and second comes the client.