While investing in mutual funds we often see a big and attractive number. Like 12% or 15% return. At first sight it looks quite good and we are convinced that our money is growing rapidly. But the reality is a little different. There may be a difference between the returns the fund shows and the money you finally get in your hands. This difference arises due to many small things, which most people ignore.
Every mutual fund charges a fee for managing your money, which is called expense ratio. This fee is deducted directly from your return, so you do not feel any difference. But its impact can become bigger over time. This fee is especially high in regular plans, because middlemen’s commission is also included in it. At the same time, expenses are less in direct plan, due to which you can get more benefits in the long run.
Time of investment also changes the result
Many times we think that if a fund has given an average return of 12% in 5 years, then we will also get the same. But it is not necessary that if you invested at a time when the market was at its high level and then declined, your returns may be less. For this reason, the return of the fund and the actual return of the investor may be different. Regular investment i.e. SIP reduces this risk a bit, because money is invested in it at different times.
The picture changes after tax
The real truth of returns is understood after tax. In equity mutual funds, after one year, profits of more than Rs 1 lakh are taxed. Whereas profits in debt funds may be taxed as per your income tax slab. That means the return you see on paper gets reduced after tax is deducted. But most people ignore this thing while comparing.
Even small charges add up to a big impact
Sometimes some small expenses are also incurred during investment, like platform fees or brokerage charges. Apart from this, if you change funds frequently, you may also have to pay exit load. These expenses may be small, but in the long run they affect your earnings.
Investor behavior is the biggest reason
It has often been seen that investors invest money at high levels of the market and get nervous as soon as it falls. They stop SIP or withdraw money early. Such decisions harm their returns. Many times the fund performs well, but due to wrong timing and decisions of the investor, his actual earnings remain less.
What exactly should you understand?
The visible returns of a mutual fund do not tell the whole story. Your real income depends on how much you spent, when you invested, how much tax you paid and what decisions you took in between. If you choose low-cost options, maintain investments for a long time and remain calm during market fluctuations, your returns can be better.
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