I wanted to shed some light on kind of cost savings you can do with smallcases.
Apart from new traders, there are many experienced investors in this forum. I wanted to highlight my take on fees charged in mutual funds and how that compares to being a smallcase investor. I am curious to know what others see and think.
The snapshot is from fund financials of HDFC Focused 30 Fund. HDFC is very transperant in their reporting and they provide a breakdown which makes it easy to explain the benifit of smallcases.Hence, I am merely using this as an example to illustrate my points - nothing more.
Also I have chosen the focused fund from HDFC as most smallcases tend to have less than 30 stocks the basket.
If you look at the items listed on the left hand side, the number to focus on for this discussion is Rs 54968 lacs that HDFC has in this fund as AUM reported as on 31st March 2018 and Rs 47521 lacs as on 31st March 2019.
Now lets look at the right hand side, we have costs for running this fund which inlcudes
- Management Fee - This is the fee the portfolio managers charge for managing this fund. As a % this works out to be 777/47521 or about 1.6% as on end of March 2019.
Lets talk about each
When you purchase and implement a smallcase, you pay only for advise and you can make this as small as you want by increasing your AUM. You get same fixed cost for unlimited assets. As long as you have picked a winning strategy, your costs are just a function of your AUM. Hence, its a good idea to pick a smallcase that is good and keep accumulating in it. This brings cost down.
Then there are plethora of charges as follows
The Mutul Fund is setup as a Trust usually and trustee fee is paid to trustees to provide oversight on behalf of fund investors. When you invest in a smallcase, you are the gaurdian and you save on this as you oversee money for yourself. For a small case this is NIL.
No GST for your efforts to manage your own money. You do however pay GST on the smallcase fee.
Transfer Agent Fee
This the cost of managing dividend payouts, subscriptions, redemptions. You pay for services provided to new and exiting investors which is expensed from the fund. Infact smallcase investors get dividend paid to their bank account at no cost to them. Not even payment gateway charges since the companies RTA does it. Isnt this paying RTA twice - once from company to MF Trust and then from Trust to benificiaries.
Its the institutional version of demat charges. For almost all brokers this is fixed and very low.
Marketing and Distribution Charges
This has always been strange to me. Why do I as an investor in the fund need to pay for their efforts to market the fund I am invested in. But this is how it is. One reason I can think of is if the fund has a lot of assets, the % charged as a management fee tends to go down, but it does not scale very well. Infact I fear if the fund is losing assets it might increase their marketing expenses to gain more assets. For example look at the number for March 2019 vs March 2018. The assets dropped by close to 15% but their arketing and distribution fees which were reported as NIL before was not NIL anymore. See what I mean ?
Again - its in the interest of the fund participants to have independent audit done. But then we have seen this check has been controversial for many companies. You dont need audit if you are a retail category investor generally - but the fund does. You can save this for yourself.
These are usually one-off costs for specific transactions they might have carried out. In smallcases these would be absent.
Investor Education Fund
This is unclaimed dividends, shares for which KYC could not be completed. The fund is expensed for operational errors, unverifiable KYC details, untraceable investors. This is not the case with smallcase.
**Full Disclosures: I am a publisher of smallcase My smallcase is on **
I am curious to know what you all think about this post and field questions or someone else’s interpretation that might be different.