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How Much Intermediation Cost In Equity Mutual Funds Is Ok

If you are a DIY (Do It Yourself) oriented person, even one buck is a cost too much. Better to shun any kind of professional involvement and learn the tricks of the trade yourself. And taking this DIY thing to extreme – why bother with the mutual fund route – buy direct stocks through a discount broker and you will be further reducing your cost of investment!!!

But WHAT IF you are not sure whether you can be a DIY investor or not? Have a look at my opinion here and here. These two blogs should give you a broad framework to assess whether you can roll on your own.

Now, WHAT IF you decide you can’t be and/or don’t want to be a DIYer and want some professional help.  Or let me put it in a different way – you want to start off your investment journey with some assistance initially, and then evaluate if you can go the DIY way. In such a situation, cost will be a consideration as any kind of intermediation will involve charges, be it through in built commissions or through fee only structure, and one needs to be reasonably sure if he/she is getting enough bang for the buck spent.

Question is – how to assess the same?

This can be dealt with objectively if you have been a fixed rate (think bank fixed deposits) investor and will stay the same without any professional assistance. Here comes the concept of “excess return”. What is the pre tax return you are getting with your fixed rate investments? Let’s assume it is 7% for a 10 year horizon. If you fall in 30%, plus cess marginal tax bracket, your post tax fixed rate comes to 4.82%

My benchmark for not minding intermediation cost of equity mutual fund investing  – double the fixed rate return, net of costs. A post tax annualized return of nearly 10% and considering prevailing tax rate of 12.50% plus cess on long term equity investments, pre tax return expectation of 11.08% does the trick. Anything higher is always welcome!!!

The real challenge comes when you have been dabbling in equity mutual fund on your own. Deciding whether you should continue the DIY way or seek  (at cost) professional assistance can be subjective. I can think of following checklist:

-          You have been at it (DIY equity MF investing) for at least 5 years. This is good enough time to get a hang of things

-          You now find investing an enjoyable activity rather than being a chore

-          You no longer fret over market volatility and actually welcome it

If answer to all these questions is a big yes, any intermediation cost is too high!!! 

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