process
Cost Predicts Return
The rule
Of all you can know about a fund beforehand, its yearly cost is the surest clue to how it will do against its rivals.
Where it flips
Cheapest is not always best. A fund can track the wrong thing, trade badly, or hold barely any money, so a rock-bottom fee can hide a fund that does not do its one job. The fix is to first pick funds that truly match what you want to own, then let low cost decide among those honest choices.
Nobody can tell you which fund will top the charts next year. But you can know exactly what it charges today. Every rupee a fund takes as fees is a rupee that never grows for you. And that drag shows up year after year, without fail. So when two funds chase the same kind of stocks, the cheaper one starts each year already ahead. Sorting funds by their yearly fee, lowest first, is the closest thing to a dependable filter you have.
A worked example
Rohan compares two large-cap funds holding almost the same shares. One charges 0.2% a year, the other 1.8%. On ₹10 lakh over 20 years at similar gross returns, that 1.6% gap quietly hands the costlier fund's managers several lakh that would have been Rohan's. [illustrative]
How to spot it
- ·check the yearly fee before the past-return chart
- ·two similar funds, very different fees
- ·ask what the fee buys you beyond the index
John C. Bogle · The Little Book of Common Sense Investing