For deriving good results form your investments cost play a very important role. How much you will earn from your investments can only be assessed if you are well aware of how much is going to be deducted from your investments. For companies the cost is a means to compensate for various expenses such as commissions, marketing, salaries, fund management etc. For investors it’s a hit to their net returns since expenses are being charged from their investments.
Misselling occurs when both parties objectives do not align with each other. When Product sellers focus on their revenues more than clients the misseling occurs. To address this issue regulators worldwide are introducing new regulations which cut down on the cost a product can charged from its investors.
There have been spat of changes in India too wherein regulators have waived completely or curtailed cost in products. As a result product companies have to connect to the investors directly and low cost avenues have been emerging for investors.
Let us see what are the low cost investment options for you in 2015 and how you can benefit from them:
- Mutual Funds
There are various cost associated with this avenue. Entry Loads was very prominent till 2009.It was one of the main reason for higher commissions to distributors. Although it has been waived, higher commissions is still prevalent in smaller towns or funds like closed ended. Apart from this there are recurring expenses like fund management charges which gets deducted from the investors portfolio. There are various capping put forth by the regulator to reduce the cost here. But these are recurring expenses and so charged every year. In short term it may not make an impact but in long term your accumulation gets affected.
Low Cost Option– The recurring expense covers many cost associated with mutual funds and so the benefit to investors can come by reducing this one aspect. This was done by Sebi in 2012 by introducing Direct Plans in Mutual Funds. In comparison to a general mutual fund scheme direct plans have .5-1% lower expenses. Again in short term it may look paltry but when you start calculating in long term investment of 10-15-20 years it creates a good amount of difference to be accounted in your investments.Since this option has been made cheaper by reducing agents services one may argue to investors not going all alone. But with entry of financial planners offering investment management on a fee the option is well considerable for investors and with online utilities or platforms coming in the industry the ease of investing will rise.
Much has been written and spoken about insurance but still a recap is good. In life insurance there are two kind of product traditional and ulips. In a traditional plans you do not come to know the charges while in ULIPs you have various kind of charges which you have to bear viz FMC, policy admin, mortality charge and others. The mortality charges is basically the premium for your life insurance cover while all other charges are for covering various expenses such as agents commission, fund management cost, marketing, policy management etc… Here also the upfront charges were very prevalent going as high as 65%. With lot of uproar IRDA stepped in and curbed these charges by reducing agents commission and having a maximum cap on all other expenses.
Low Cost Option– If one is looking for low cost insurance coverage then online is surely the choice. We have seen how online term insurance is now making its way for providing high coverage at bare minimum cost. No doubt it elevates the agent services. In that case offline is the option. But what’s more important is that one need to ensure buying right product here. If you need insurance go for a pure term plan. If you wish to invest evaluate avenues and then decide. ULIPs too are aiming to become cheaper by offering you online purchasing. First Bajaj then HDFC and now Aegon Reliagre have come in to offer online ULIPs. They does have lower cost but as I said when it comes to investing then there are choices which you need to evaluate on various parameters and decide.
Fixed Income Schemes
This comprises mainly fixed deposit , PPF & other small saving schemes, NCDs etc.. There is no differentiation in the options as the interest is paid by the issuing agency and so you know very well what you will earn. Although the interest may vary as per the rules what matters here is taxability which reduces the earnings considerably.
Low Cost Option– In fixed income products there is no differentiation if you buy it online through some platform or through any agent. The interest you earn remains the same. So not much can be written on the cost as you are well aware what you will earn form these instruments. You can reduce your cost by looking at the post tax returns from these schemes.But surely the ease of investing will rise as online investing evolves.
The cost has always been a major hindrance in any investment product. It has raised many eyebrows and for the right reasons. The low cost avenues will evaluate and it is much to the investors to make the full use of it. There will be counter views but the need is yours and so you can decide what is best. At present there may be operational issues which you may have to face while investing online but the ease will rise as we move ahead. Technology is playing and will play a major role in giving you cost effective options. So while investing in 2015 evaluate the cost you will have to pay and then makes a decision. As for advice you will have more planners coming in for your guidance. Start paying for the advice and invest in low cost options.
Are you investing online ? How has been your experience?
Share your views in the comment sections….