Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
This can greatly impact your returns! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jul 20, 2010

    This can greatly impact your returns!

    Chirag and Hitendra, both of whom recently retired decided to meet up. While both friends had studied together and started their careers together, Chirag had worked in the finance sector and Hitendra had joined the marketing department in a small firm. Today, after a number of years they decided to meet up at their favorite hangout from their college days.

    Chirag drove up a few minutes early and parked his car in front of the cafe. The cafe brought back old memories and he started thinking of Hitendra in his clean but worn out clothes and the number of times he lent him money as Hitendra was unable to pay his various bills. So Chirag was more than a little surprised when Hitendra finally arrived and looked financially quite well off.

    In the cafe after the pleasantries, Chirag could not hide his surprise and blurted out what was on his mind.

    Hitendra laughed and told him his story. "See", he said, "when I was 20, I inherited Rs 100 thousand from a relative. This money I decided to invest for long term. Everyone, whom I asked for advice, guided me to put this money in a mutual fund. Being only 20 years old, they said, I could take the risk of investing all this money in the equity markets. The benefit of mutual funds, they said, is that they are run by professional managers who will manage my money and keep it safe. However, they will charge me 2.5% of the total amount invested with the fund for their services. Being young, I decided that this money I would invest myself in the stock market as I thought that it would be a learning experience.

    When I started off I lost a lot of money listening to other people's tips on stocks. At times, I thought that I had been foolish not to invest in mutual funds. Then however, a neighbor guided to read about finance myself. I started reading financial newspapers and devoting a few hours every week to reading financial books and annual reports of companies. It was then that I started investing cautiously and in only those company's whose long term potential I believed in. Gradually I recovered my lost money and when I retired last month my corpus from my initial investment was Rs 26 m. This was at a compounded return of 15% for 40 years which incidentally is also the long term return of the Indian stock market.

    However, you will be interested to know that my younger brother had also received a same amount from this relative. He had then invested it in mutual funds. Last month his corpus from this 100 thousand stood at Rs 9.7 m. Why do you suppose this happened? You see his total management fee over the last 40 years was Rs 1.9 m. This is 20% of his end corpus. But you are familiar with the power of compounding. Had that 1.9 m not been deducted, he also would have got a 15% annual return like mine and ended up with a corpus similar to mine. Instead he got a 12% compounded annual growth rate and this ended up with him losing Rs. 17 m at the end. In other words, his total corpus at the end of the period would have been more than 2.5 times than the amount he ended up with had he achieved the same result without paying the 2.5% management fee."

    With this Hitendra smiled at his friend and said, "today's lunch is on me".



    Equitymaster requests your view! Post a comment on "This can greatly impact your returns!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)