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The Power of 1%

1%. Ain’t that an insignificant figure? What could be the impact and the Power of 1%?

I mean, can anything significant be achieved by improving only 1%?

Not much really. 

Or can it?

The progress that anyone notices in the short term may seem inconsequential.

Albeit, over the long term the story is much different.

Think about this. If one gets better by only 1% a month in any area of Life, there can be little doubt that (s)he would take a quantum leap in only a couple of years down the line.

Keeping this in mind, let me demonstrate the impact 1% would have in your Portfolio.

Sheer Magic

‘An Investment in knowledge always pays the best Interest’ – Benjamin Franklin

The world of Investing is magical. And I bet, you will be amazed at seeing the impact 1% has over a long term.

Let me demonstrate this using a simple example.

My good friends, Mr.X & Mr.Y both are aged 20 years and have free cash in hand amounting to Rs.25k each.

They decide to invest in 2 different Equity Mutual Funds i.e Fund A & Fund B

Assuming that the Annualized returns generated by both is constant that being Fund A and Fund B generates 14% and 15% return resp. through all time periods, here is what they end up with.

The table below illustrates the fascinating outcomes.

And don’t worry, very simple mathematics is used here for representation purposes.

Age in Years of Mr.A and Mr.BInvested Amount by bothInvested in
20₹ 25,0002 Equity Large Cap Mutual Funds
The Power of 1%

What you get after different time periods

The Power of 1%

You have it right before your eyes.

Notice how as time passes by, the gap in return widens.

After 40 years that is when both my friends Mr.X and Mr.Y retire at 60 years, they would be left with over 47 Lacs and a little less than 70 Lacs resp.

The difference is a whopping 23 Lacs.

So there it is the Power of 1%.

Ist’t it fascinating?

Takeaway

‘How many Millionaires do you know who have become wealthy by Investing in Savings Accounts? I rest my case.’ – Robert G. Allen

Undoubtedly, 2 takeaways that come forth from this is illustration is:

  1. It pays to stay invested (this is worth repeating again and again; I have talked about it at length in my previous blogs and hence won’t spend much time stressing on its importance).
  2. Every % of Return counts and so it is wise to choose the right Investment destination to put your money in.

By now, if you have been following my blogs it is very evident that I am an ambassador for putting corpus into Equity Mutual Fund.

Undeniably, look at no other Investment avenue if your time horizon is over 5 years at the least.

Having said that, let me show you how you can save that extra 1% which might have a huge impact on your Portfolio return over the long term.

Direct Mutual Fund Vs Regular Mutual Fund

It’s the Investor who is risky, not the investment’ – Robert Kiyosaki

There are primarily 2 ways to Invest in a Mutual Fund as explained below:

1. Regular Mutual Fund

This would indicate Investing via an intermediary which may be an advisor or Broker etc. Since the investment is routed through them, fees in the form of intermediation would need to be paid here.

Here, the commission gets deducted from the invested amount and remaining corpus is invested.

2. Direct Mutual Fund

Investing via direct route involves routing your Investing corpus directly from the Asset Management Company/Mutual Fund House. Needless to say as no Intermediary is involved here the returns tend to be higher than that invested via Regular Mutual fund route.

In effect, any category of Mutual Fund would have the same fund manager managing the same fund with all other parameters the same barring the route of Investment i.e Regular Route or Direct route.

Broadly speaking, a Regular Equity Mutual Fund charges 1% as the Asset Management Charges (cost of managing the fund via an expert Fund Manager) and 1% as the cost of intermediation.

In any Direct Mutual Fund, the cost of Intermediation goes out of the window as no Intermediary comes into the fray.

And there you have it. A cool 1% extra return viz-a-viz Regular Mutual Fund.

Let me validate what I claim

Notice the difference in expense ratio of Axis Bluechip Fund Regular Plan against that of Direct One. The difference is almost to the tune of 1%.

The Power of 1%
The Power of 1%

Who Should Invest via Direct Mutual Fund Route?  

A Direct plan is best suited for those who have a keen sense of knowledge and understanding of the Investing World.

For those who invest via the Regular Route, it is about time you shift gears.

With a little bit of extra effort, you may be in to earn big rewards.

Thanks to the Digital age that we live in, everything is available at the click of a button.

Why not make full use of it?

It is about time you take control of your portfolio and not blindly trust the advisor or broker to manage your money.

Get this. All that one needs to do is read one article on investment a day which hardly takes 5 minutes of your day. That is what I ask you for.

Your 5 minutes.

Think about this. If you make this a habit and then in a year’s time you would consume 365 articles.

I can bet my boots on it, your knowledge on Investing would climb several notches. 

It is your hard earned money, take control. Period.

Happy Investing.

Also Read: My Journey As An Equity Investor

3 thoughts on “The Power of 1%”

  1. Pingback: When Is The Best Time To Invest? - A Blog by Yogesh Vij

  2. Pingback: Super Power of Compounding - A Blog by Yogesh Vij

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