Why We Think that Recompound is a Better Alternative to Stock Mutual Funds? (Part I)
TLDR: Mutual funds have fees that are paid by investors irrespective of fund performance.
Setup Difference: Recompound vs Traditional Mutual Fund
An important reminder before we start: the underlying investment vehicle of Recompound is vanilla stocks. Your stocks and cash reside under your name, at all times. Recompound does not have access nor control over your brokerage firm. You are the ultimate decision maker to purchase or sell a stock that you own, even with Recompound’s service.
Now this is a completely different setup compared to a mutual fund. When you buy a unit of a stocks mutual fund, you are putting your money into a pool. This pool of funds is managed by a highly qualified and intelligent team of fund managers in an asset management company. The decision to purchase and sell stocks under this pool is given out entirely to this team of fund managers. More often than not, their goal is to beat or replicate the index (IHSG or LQ45).
Fee Structure of a Mutual Fund
Explicit Fees
Now let us take a look at the fees that are commonly incurred when you purchase a unit of mutual funds. When you browse any fund fact sheet, you can glean more information about the mutual fund fees (see below).
These are standard fees that are incurred when you purchase a mutual fund that belongs to any asset management. They are:
Purchase fees
Sell fees
Switching fees
Management fees
Custodian fees
These are explicit fees that are commonly understood by investors when they purchase a mutual fund. They are commensurate to the amount of capital that the fund is managing and they are paid to the asset management firm irrespective of the performance of the fund.
Consider a scenario when you have Rp 100 to purchase a mutual fund. Assuming that the buy transaction fee is a meagre 1.5%, your money is immediately reduced to Rp 98.5. Then regardless whether that fund is profitable or not for the year, the fund will take a further percentage from the asset under management (AUM) as the management and custodian fee.
Less Explicit Fees
Furthermore, there are other fees that are hidden because they are commonly not included in the fund fact sheet. They are usually described in full in the prospectus. Often overlooked fees include:
Transaction fee of stocks that is included in the mutual fund.
If the fund manager changes position frequently over a period of time, then this transaction fee would be non-trivial. Especially for mutual funds that aim to emulate the movement of large indices like IHSG, rebalancing of mutual funds would be necessarily frequent to keep up with the volatile stock market.
Audits, taxation and other expenses that relate to the mutual fund is also taken directly from the pool of funds.
As the fund requires audits, taxation payable to the government and any other urgent matters deemed relevant to the fund, the money would come from the pool of funds which would decrease net asset value.
We are not going to go into the details or perform a meta analysis of the mutual fund fees in general. Nonetheless we hope that we have given a rather clear illustration that a non-trivial expense is still incurred regardless of the performance of the funds, and they can also be hidden, only to be found when we carefully take a look at the fund prospectus.
Fee Structure of Recompound
Compared to a mutual fund, our setup is much more straight forward. Recompound only has one fee, which is a subscription fee (yes, like paying for Netflix). Nevertheless our fee structure is performance based. Meaning that our customers only need to pay us when their portfolio value reaches an all time high value at the end of the month.
We have described our fee structure, incentive alignment in this blog post and we encourage you to take a plunge on that too.
The point that we are trying to make is that if we compare mutual fund and Recompound fee in a head to head manner, with the following assumptions:
Mutual fund fee is only 3.5% per annum
Returns from Recompound and mutual fund is the same
In order for Recompound to be more costly, the returns of both mutual fund and Recompound would need to be more than 20% per annum.
Closing Remarks
Mutual funds are incredibly popular that is available for investors with little to no time to manage their investments. Based on the fee structure comparison, we are making the case that Recompound’s service is a better alternative.