EXPENSE RATIOS

When I consider investing in mutual funds, why are expenses so important?

Expenses are important to the basic evaluation of mutual funds because, although the percentage derived in the expense ratio may appear small, over time, as we look at historical returns of the fund, it can suppress the returns we want or need from our investment. When a mutual fund has an expense ratio of 0.5%, it means that 0.5% of the fund's assets are used to offset expenses to manage the fund every year.

What are a mutual fund's expenses?

The mutual fund's expenses may include management fees, offices and staff, and taxes.

What happens to the expense ratio if a mutual fund is small or new?

When a mutual fund is new, or when a fund has a relatively smaller amount of total assets under management, the fund must allocate its expenses across a smaller pool of investors, making the expense ratio appear high.

What are typical expense ratios of mutual funds?

According to experts, typical actively managed U.S. equity mutual funds may have expense ratios of approximately 1%, while many passively managed index funds may have expense ratios of approximately 0.06%.

How do I compare expenses of mutual funds?

The SEC website provides a mutual fund expense calculator that allows you to compare expenses related to mutual funds. Many websites provide information regarding the expense ratios of funds, so that investors may compare expenses in order to make a better-informed decision before purchasing.

What is the trend in mutual fund expenses and fees?

According to the ICI, the fees mutual funds charge their investors has fallen by half since 1990. This is due in part to the popularity of passively managed funds, as well as cost-cutting activities of actively managed funds.

Why are fees and costs of mutual funds so important in deciding which fund to choose?

The size of the expenses or fees that a mutual fund charges may lower your annual return. Mutual funds with the highest returns and lowest fees will give investors very good

Why does the expense ratio matter?

If your fund has an annual return of 5% this year, and has a 2% expense ratio, your annual return is actually only 3%. The return could have been nearer 5%, but high expenses make it lower. The same type of fund with a lower expense ratio would put more money in your pocket over time, since it spends less of your money administering the fund. This is why expenses matter.

returns over time on their investments. Funds with average returns and high expenses may perform much worse over time.

 
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