Three things to consider when comparing cost of products
In some products, there can be more than one type of fee attached and you must add up everything to find the true cost
One of the features to keep in mind before choosing one investment over another is cost. Cost is nothing but the fee you pay to invest. Fees can be varied, which means that different types of products will have different types of fees. Comparing fee at face value may not be accurate. Here are three things you need to keep in mind when calculating the fee you pay for a product.
Is it recurring?
While simple products like bank fixed deposits don’t have any fees, there are one-time account opening fees and recurring management fees attached to other products; some may have a combination of both. For example, managed funds come with recurring management fees, but if you consider investing in direct equity, there is a one-time account opening fee for most trading accounts, the demat fee involves annual maintenance charges and transaction-based brokerage.
Recurring fee is mostly applied to managed products like mutual funds. Broking fee is also recurring but it gets charged per transaction.
Real estate purchases also have a broking fee involved. However, it is more like a one-time outgo, given the nature of the transaction itself.
Some managed products may have a one-time and recurring fee; alternate investment funds have a one-time set-up fee and a recurring management fee.
How is it applied?
Where the fee is shown as a percentage, it’s left up to you to figure out what to apply that to.
For example, a 2% management fee for managed funds will get applied to the current total assets under management. If your investment is worth ₹10,000 now then a 2% fee will mean a charge of ₹200. On the other hand, in unit-linked insurance plans (Ulips), a premium allocation charge is applied to the premium paid. There is also a fund management charge which is applied to the accumulated amount you have invested via the Ulip. As the market value of your Ulip investment grows, the amount deducted for this will change proportionately.
Similarly, equity brokerage is applied when you buy a stock and when you sell it. In the buy leg of the transaction, the brokerage is applied to the market value then; similarly, in the sell leg, it is applied to the current market value.
What’s the period?
Lastly, you need to check what period the fee is payable for. An annual fee is applied for an investment spread over 12 months. For example, a 2% management fee for a fund is an annual management fee but a 0.1% brokerage is applied at the time of the transaction. The two fees are not strictly comparable. If you want to compare, you must consider the period for which you are going to hold the managed fund and calculate accordingly before comparing.
Fees and costs are never a deciding factor by themselves when it comes to choosing an investment. However, for certain products there can be more than one type of fee attached and you must add up the entire string of fees to know the true cost.
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