A costly affair

While everyone looks at borrowing costs, expenses are also involved when one has to invest in different investment products. For instance, in new fund offerings (NFOs), asset management companies were allowed to charge up to 6 per cent of the corpus collected as marketing expenses for open- ended schemes till last year. This was amortised over five years. The guidelines have been changed and now open-ended schemes are not allowed to charge this amount.

However, this restriction is not applicable to closed- ended funds. No wonder, there has been a spurt in closed-ended NFOs. Most of this charge is passed on to the distributors. They end up making as much as 4 per cent to 6 per cent during the NFO period. Now you know why your agent or distributor calls on you each time a new fund is being launched.

Another cost that you have to incur is the entry and exit load. Most of the equity funds charge 2.25 per cent as entry load. Entry load is charged every time you commit new money to a fund. This includes each Systematic Investment Plan (SIP) instalment, as well. This charge is deducted from your investments by reducing the number of units allotted to you.

And of course, there are costs like portfolio turnover cost. That is, the higher the turnover of the fund assets, the more brokerage and securities transaction tax (STT) charge, they will be paying. All this is at the cost of your returns.

What should you do? Simply put, don't invest in NFOs. In fact, try to avoid open-ended funds that are not more than five years old. If they were launched before July 2006, their NFO expenses are still being amortised and you will have to pay for them. Invest in good funds with low expense ratios. Some of the other criterion to look for include:

• Does the AMC absorb some of the expenses rather than passing them to investors?
• Do they have low portfolio turnover?
• Do they charge reasonable fund management fees and not the maximum allowed?

Of course, with the insurance companies wanting to position themselves as investment as well as insurance products, there are a large number of costs like in policies like moneyback, ULIPs and other investment-linked products.

These expenses include policy charges like mortality, fund management, administration, fund switching and partial withdrawal, among others. After that there are premium allocation charges and policy administration charges.What should you do? Opt for a pure insurance product like a term plan to bring down your cost. And invest through mutual funds.