Daijiworld Media Network – Mumbai
Mumbai, Nov 6: Investors are increasingly paying attention to the hidden costs of investing, including fund management fees, transaction expenses and taxation. However, financial experts say the focus should not be limited to reducing expenses but should also consider the returns generated after accounting for costs and taxes.
According to Arun Patel, Founder and Partner at Arunasset Investment Services, the real objective of investing should be to maximise long-term, risk-adjusted returns rather than simply choosing products with the lowest charges.
Explaining the cost implications of passive investing, Patel said index funds, despite being promoted as low-cost investment options, carry an inherent expense disadvantage compared to their underlying benchmarks.
An index fund replicates the performance of a selected market benchmark. For instance, if the benchmark delivers a return of 12 per cent and the fund charges an expense ratio of 0.5 per cent, investors begin with a disadvantage of approximately half a percentage point, even before accounting for tracking differences.
Actively managed mutual funds, Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), meanwhile, generally charge management fees ranging from 1 per cent to 2.5 per cent annually, with some also carrying performance-based charges.
Patel said such expenses could be justified when investors receive additional value through better stock selection, risk management, diversification and access to specialised investment opportunities.
Even a modest improvement in annualised returns, he explained, could translate into substantial additional wealth over a period of 15 to 20 years. However, higher fees do not automatically guarantee better performance. Investors should therefore compare the returns generated after expenses rather than select investments solely based on their charges.
On taxation, Patel pointed out that India's equity taxation framework remains relatively competitive. Eligible long-term capital gains from listed equities and equity-oriented mutual funds held for more than 12 months are taxed at 12.5 per cent on aggregate annual gains exceeding Rs 1.25 lakh, excluding applicable cess and surcharge.
This allows investors to earn up to Rs 1.25 lakh in eligible long-term capital gains annually without paying capital gains tax. Remaining invested also enables investors to defer taxation until the gains are realised through a sale, allowing unrealised appreciation to compound.
He also highlighted developments in fixed-income investment structures, particularly Income Plus Arbitrage Funds of Funds. These combine debt-oriented investments with arbitrage strategies and may qualify for long-term capital gains taxation at 12.5 per cent after a holding period exceeding 24 months, subject to applicable tax rules.
This can offer a tax advantage over conventional debt funds, where gains from investments made under the newer tax regime are generally taxed according to the investor's income-tax slab.
Patel further cautioned that investor behaviour can often have a greater impact on wealth creation than management fees. Frequent portfolio changes, chasing recent market performers, panic selling during market corrections and holding excessive cash can significantly affect long-term returns.
Inflation is another major factor that investors should consider. At an annual inflation rate of five per cent, money kept idle loses approximately 39 per cent of its purchasing power over 10 years.
He emphasised that investors should evaluate the overall value generated by an investment rather than focus exclusively on visible charges.
"Ultimately, investing involves costs, just as virtually every professional service does. What matters is whether those costs contribute to a better financial outcome," Patel said.
He added that avoiding reasonable investment management fees or taxes on long-term gains could prove counterproductive if investors choose to keep their money idle, as inflation would continue to erode its purchasing power.