Hidden costs to consider before making an investment decision
Posted by: Arti Bhargava on Jul 23, 2018, 06.30 AM IST
Avneet is a diligent investor who makes all his investment decisions with utmost care. Of late, he has noticed that many costs associated with investments are eating into his returns. Avneet wants to know what are the costs he should be aware of and how he can avoid losing money.
To start with, Avneet must realise that considering the costs related to his investments are integral to the decision making process. This is because costs incurred as fees, brokerage and commissions eat into the final returns. Over the long term, this can have a significant impact on the value of his investments.
He must remember that costs he bears include those where he makes a direct payment and also those that are inbuilt into investments such as mutual fund expenses. The other cost that is likely to be overlooked is the penalties imposed on investments. Charges on delayed payments or early withdrawals from investments also impact the returns.
He must not let the investments’ performance alone dictate his attitude to costs. What may seem like a small charge when investment returns are good may be a big drain when performance dips. Avneet must consider all the visible and invisible costs carefully and make sure they are justified before committing. Withdrawing later may be difficult and expensive.
High cost can be justified only if the investment is consistently generating much higher returns. Avneet can avoid penalties by automating the operational aspects and making sure that his portfolio has adequate provision for his liquidity needs so he does not have to exit an investment by paying high charges. Additionally, he must question every time he is adviced to sell an investment he is holding and invest in a new one, as churning also translates into higher costs.
Avneet must use service providers who link the fees to transactions and not charge an annual fee or flat fees. Flat charges work well only if the number of transactions are high enough to apportion the costs. Hence, being aware of the impact of costs on his investments and assessing the costs related to each investment before committing will ensure that his money works in his interest.
(The content on this page is courtesy Centre for Inve ..