The Hindu Business Line : Ignoring `expenses' may prove costly

Mutual funds have to incur certain costs while managing their assets, costs that no investor can afford to ignore for long. For many sections of the market these expenses may still look marginal or even inconsequential, especially so for the short term. However, their combined, long-term effect can be quite different.

A number of asset management companies have in recent times worked out special plans for large institutional investors, ones that are relatively cheaper. Retail investors are not as lucky as servicing smaller accounts are a comparatively expensive affair. As distributors point out, investors will do well to identify funds that carry lower expense ratios. In fact, the lower the ratio, the more can be the potential gain.

The point is that expenses can turn out to be an important differentiator in the days ahead, with at least a few sections of the market rooting for them in a big way. Performance (that is, return on investment) will of course continue to be the biggest issue for investors but expenses can well rank among the other critical factors that guide serious allocations.

The situation, it is pointed out, is being fully exploited by the large players who dominate the investment fraternity in terms of size and stature. Retail investors are, by their very characterisation, at the other end of the spectrum and at a disadvantage on many fronts. And, as this column has mentioned earlier, they remain a vulnerable lot when compared to their institutional counterparts.

And their lot is likely to remain the same as before, irrespective of the changes that have happened lately in the market, some of them initiated by regulatory agencies such as the SEBI and the RBI. More than any one else dabbling in the market, the retail participant needs to follow a cautious, disciplined approach. Entire financial plans (and hopes & ambitions) can be ruined by mistakes, often committed in the wake of the exuberance displayed by large, informed players.

Mutual funds know for sure that retail investors can be their greatest and most loyal friend in times of need. Just consider the volumes they can provide! Or the increased possibility of tapping the vast bank deposits that earn low returns. Funds therefore must join hands with other stakeholders, including policy makers, to create the right investment climate for the common man. Some efforts have indeed been put in by the likes of AMFI but the unfinished agenda continues to be quite heavy.

Attempts by leading fund houses to offer low-cost options, one is sure, will be welcome by all concerned. It needs to be remembered that options before the small investors are already quite limited and may even shrink further in the days ahead. In fact, there is a strong case for devising superior alternatives right at this juncture. Mutual funds will do themselves a service if they can rise to the occasion.

Feedback may be sent to blcal@vsnl.net

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