Last Updated on December 28, 2021 at 3:15 pm
Each financial year, we do our best to reduce as much income tax as possible. I am only referring to legal means (!)- the most common of which is investing in tax-saving instruments. We do this because income tax hurts. The thought of losing a significant chunk of our salary fills us with a sense of loss*. Why do most of us not feel that sense of loss while investing in commission-based (regular) mutual funds? Especially when investing via banks, demat accounts and via “free accounts”? If you are a direct fund investor, do consider forwarding this to a fellow investor who thinks “someone else” will the sales guys their commissions.
Announcement 1: You Can Be Rich Too with Goal Based Investing, my first book is now available at at a 35% discount for Rs. 258. It comes with nine online calculators. Get it now.
Announcement 2: Gamechanger, my second book is now only Rs 149 (25% off). Get it or gift it to a young earner
* Income tax is a duty, responsibility and in a sense a right of every Indian citizen. This post is not about that.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Remeber that ice cream analogy? Why do you think we all like and relate to this so much?
The best way to teach your kids about taxes is by eating 30% of their ice cream.
The reason is simple. We see, actually see the taxes being deducted from our income. That is why it hurts so much.
I am not trying to compare mutual fund commissions (all product commissions in general) with income tax. I am only trying to say, what you do not see get deducted (like ice cream and tax) does not hurt as much or worse, not at all.
Just imagine if the government orders all the employers to only declare after-tax income and ensure tax is deducted in full with no 80C etc. (don’t overthink the how’s and why’s) and the actual amount of tax we pay is obscured in fancy math and language (as it is, the Gazette is written some vaguely familiar archaic tongue).
Most of us may actually believe that we pay no tax because it not deducted visibly! And some of us may believe that the tax paid(deducted) by the employer is from their profits and not from our salaries. Sounds silly and preposterous, no? Hang on.
Now consider what happens with a mutual fund. When you start a SIP, the sales guy receives say, 0.75% of your 1Y investment in advance. Then 0.6% of the current total investment value (call this CIV) will be paid after 1Y.
During year 2, 0.6% of your CIV
During year 3, 0.6% of your CIV
During year 4 and later 0.4% of your CIV
The CIV can increase or decrease as decided by market forces. Imagine if we do get that 18% return promised over 10Y, 15Y, 25Y, imagine the money lost in commissions (you don’t have to imagine, just use the links below and make an estimate).
This is the real reason why the sales guys keep parroting “never stop your SIP”.
Commissions are higher if an investor is not from ” Mumbai (including Thane & Navi Mumbai), Delhi (including NCR), Bangalore, Kolkata, Chennai, Pune, Ahmedabad, Hyderabad, Baroda, Ludhiana, Jaipur, Lucknow, Surat, Kanpur and Chandigarh”
Thanks to Swapnil Kendhe for the explanation. For more details, follow this trail
A good deal of AUM has flowed in from “other cities” because of this!
All this reminds me of:
Source: http://www.theonesean.comBecause only one thing counts in this life: Get them to sign on the line which is dotted. You hear me? A-B-C. A-Always, B-Be, C-Closing. Always be closing. ALWAYS BE CLOSING. A-I-D-A. Attention, Interest, Decision, Action
Where do you think that 0.75%, 0.6% etc. commissions come from? From the amc pocket? From their profits? ha!
No, they come from our pockets, our investment – its current value. All the AMC does is to collect it in the form expense ratio and payout commissions.
The point of this post is: We do see the commission go out of our pockets! The NAV is reported after expenses. Therefore the returns you see are after expenses. You never know that it is deducted. What you cannot see, what you cannot feel, does not hurt you.
When a fund investment portal offers us a “free account” and says they get commissions from the amcs for the transaction we make, we would be plumb stupid to think the portal is free and commissions are sources from “elsewhere”
Only recently SEBI has mandated a disclosure of all commissions paid. This has increased awareness but is still not enough. We still do not see the commissions leave from our pockets.
Imagine if the upfront commission is mentioned in the transaction. Say Rs 40 bucks explicitly deducted for each Rs. 5000 SIP instalment. We would see the money leave go out, just like a tax deduction. It would hurt a lot more. That is precisely the reason why it is not done that way!
In its current form, mutual fund commission structure is extremely complicated. Even distributors have a hard time figuring it out. It is high time that commissions be in the form of an entry load on the investment and not on the investment value.
That is never going to happen. So it is time we said goodbye to regular fund (they are called regular because they provide regular income to the fund house and sales guys) and shift to direct mutual fund plans.
I have written at length about the cost of not shifting:
Illustration: Direct Mutual Funds vs. Regular Mutual Funds
How to Invest in, or Switch to Direct Mutual Fund Plans
16 Ways to Invest in Direct Mutual Funds and counting (will update this shortly)
If you need professional help in shifting to direct plans, consult a SEBI registered fee-only financial planner from Fee-only India: a movement to serve investors and advisors
At least mutual funds have a direct option! Except term insurance, all forms of insurance do not have a direct option and insurer gobble up the commissions paid if you buy online!!
Announcement 1: You Can Be Rich Too with Goal Based Investing, my first book is now available at at a 35% discount for Rs. 258. It comes with nine online calculators. Get it now.
Announcement 2: Gamechanger, my second book is now only Rs 149 (25% off). Get it or gift it to a young earner
Use this form to ask general Questions or about the robo template ONLY (For comments/opinions, use the form at the bottom)
And I will respond to them in the next few days. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you. PLEASE DO NOT POST COMMENTS/OPINIONS WITH THIS FORM it is for questions only.
[contact-form][contact-field label=”Name” type=”name” required=”1″][contact-field label=”Email” type=”email” required=”1″][contact-field label=”Ask your question (Got an opinion or comment, use comment box at the bottom of the page. DO NOT post them here)” type=”textarea” required=”1″][/contact-form]
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)