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A Guide to Investor Fees

Whether you are new to investing or an experienced investor, investing is a time-consuming process as it involves studying and researching the capital markets, selecting investment vehicles, and managing and tracking the investment. For this reason, there is a tendency to delegate this responsibility to professionals. These professionals invest your money and manage and track your investment, which comes at a cost. And for this reason, people are on the lookout to know what investment company has the lowest fees. But before doing so, it is important that you understand why they matter, fee structures and types of fees.

Before getting into fee structures and fee types, let us understand why fees matter. These are explained in the section below.

Why Fees Matter

Investment fees lead to a reduction in profits or an increase in losses from the investment.

Understanding the fees help better evaluate the true cost of investments in the portfolio and services received from the investment advisor.

The transaction history over the year help make better investment decisions.

Facts about Fees You Should Know

All fees reduce your returns and therefore, you should know what they are, what you’ll get for them, when you’ll pay them, and where they’ll be deducted.

Investment advisors are paid by their clients directly, the firms they work for, or by the institutions whose investment products they sell. The amount paid by you to advisor’s firm and what they received from others can be tracked from your annual investment fee report

There are lower fee options available, even among very similar products. Some fees may also be negotiable and therefore you should consult your investment advisor about the fees that would be charged and also enquire about any lower fee options.

Fee Structures

Generally, most Portfolio and Investment Management services providers offer a choice between a fixed-fee structure and a composite profit-sharing (that is, variable) one. The fixed-fee model charges an annual fee to the investor, whereas in the latter case, a lower annual fee between 1-2.5% is charged, coupled with profit-sharing fee. The profit-sharing fee is charged on the returns generated in excess of the pre-determined rate, and these are approximately 15-20% of profits.

With that being said, the answer to what investment company has the lowest fees can partially be answered, wherein the investment company which has higher pre-determined rate is likely to earn lesser fees. But to fully understand this, we recommend you familiarize yourself with the below mentioned fee types.

Types of Fees

Entry Load – These are charged at the time of buying the Portfolio Management Service (PMS).

Management Charges/Fees – These are administration charges for the PMS manager for monitoring your account.

Profit sharing – These are typically performance fees in excess of a pre-determined target. These rates differ according to the PMS provider and also the scheme opted for.

Transaction brokerage – These are charged by the broker for using the platform for trading and is usually a percentage of the amount traded per transaction.

In addition to the above, the PMS also charges custodian fees, demat account opening charges and audit charges.

Now that you are aware of the various fees involved in PMS, you will be in a better position to assess what investment company has the lowest fees. The answer then is that the investor should compute the Total Expenses amount and compare it with other PMSes and with other schemes. In addition, Mutual Funds is an investment instrument and also a sub-set of Portfolio Management Services and these too have similar charges as those charged by PMS schemes and these too should be compared with other Mutual Fund houses and other schemes. These are generally invested by retail investors who do not qualify to avail for PMS due to minimum investment requirements and thereby not having High-Net-worth-Individual (HNWI) status.

However, there are certain types of investment products that carry high fees and there are also those which are geared towards low fees. Understanding and knowing these would help you better assess what investment company has the lowest fees:

High-Fee Investment Types

The general consensus is that, the more specialized the asset class, the higher are the fees levied. For instance, commodity Exchange-Traded Funds (ETFs), corporate bonds. Derivative products such as equity-linked notes are known for their notoriously exorbitant fees.

Low-Fee Investment Types

The general consensus is that, the more mainstream the asset class, the lower are the fees levied. For instance, Indexed Products such as ETFs and index mutual funds carry low fees and are attractive to value-conscious investors. Such funds often have alternatives available from several providers to evaluate (e.g. multiple Nifty index funds).

Now that you know about both, High-Fee and Low-Fee Investment Products, assessing and finding out what investment company has the lowest fees would be less time-consuming.