December 7, 2017

Why you should NOT invest in actively managed funds

Reason is simple...high management fees. Typical fees are around 2.5% which means over a 10 year period you have paid off 25% of your capital towards management fees.

And if the market has not gone anywhere (CAGR is 0), then your NAV (after fees) has come down by 25%. This means the NAV has to increase by 33% for you to break even.

Here is what your investment will look like if you invest 100000 pa by SIP in any actively managed fund. The assumed CAGR is 15% while the Actual Return column is after adjusting 2.5% towards management fees.

As you can see, the reduction in profit is almost 300,000/- which is equal to 3 year SIP amount. Note that the maths is not perfect as I have used a simple CAGR formula and not adjusted the balance at the end of every year.

I have not considered brokerage... this will knock off another 0.5% pa.

The alternative for investment is any passively managed fund  (eg index fund, ETFs etc) - here the management fees is 0.5%.

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