Maintaining Efficient Portfolio Turnover

The 3rd Leg of the 3E strategy is Maintaining efficient portfolio turnover and cost.

Many investors are unaware of precisely how much they are being charged for their investment activity, so let’s have a look at the costs the average investor might incur.

Investors believe that the total expense ratio is the only cost that is incurred by them as a part of their investments. But there is also a hidden cost that is not disclosed in any of these figures: the cost of dealing within the fund. When a scheme or an investor deals in stocks, he or she pays brokerage commissions, securities transaction tax at 0.1 per cent, exchange transaction charges,
stamp duty, turnover fees and the difference between the broker’s bid and offer prices (the spread) are often referred to as the impact cost.

Our internal research suggests that hyperactive fund managers who run portfolio turnovers exceeding 100%, end up incurring these additional undisclosed costs of up to 1.4 per cent each year on top of the “total” expense ratio.

The third pillar of our strategy is aimed at reducing these hidden costs and consequently improving performance. After managing to buy good companies at reasonable prices (or better) we hope that we need to take no further action. This will then facilitate the compounding of our investments over time as the companies continue to reinvest their cash flows. This also minimises the frictional cost of trading.

Samco Mutual fund is the first mutual fund in India that will transparently disclose all voluntary dealing costs. Voluntary dealing costs are all costs incurred by the fund manager for purchases and sales excluding the costs incurred for involuntary transactions such as fund inflows/outflows. This shall be computed as a percentage of the AUM. This will help investors compute the total cost of
investments which is a sum of the TER and voluntary dealing costs.

Samco AMC to be India’s first AMC to disclose Voluntary Dealing Costs

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