Fund Fees: Don't Throw Money Down The Drain
By John Persinos
Do you know exactly what you pay in mutual fund fees? If you're like many retail investors, probably not. But over time, substantial money is at stake. Below is a quick primer on mutual fund fees. Even seasoned investors could use a refresher on this topic.
Always check the fund's expense ratio, which is stated in the fund prospectus. The fund's expense ratio is its annual operating expenses divided by its average annual net assets. An expense ratio is the percentage of your assets a fund claws back each year as payment for its services.
All mutual fund investors face annual charges and deductions for various ongoing expenses, the majority of which are tabulated in a fund's expense ratio. That is, if a fund manages assets totaling $400 million and charges $2 million, it would report an expense ratio of 0.5%.
The average expense ratio for actively managed mutual funds is between 0.5% and 1.0%. For passive index funds, the typical ratio is about 0.2%. Most analysts consider an expense ratio of 1% or less to be reasonable.
Although we all know of high-cost funds whose performances seemingly justify their expense ratios, history demonstrates that expensive funds are more likely to lag the market.
From 2017 through 2021, the average expense ratio for passive funds declined 8% and the average fee for active funds declined 12%. Greater competition and savvier investors are contributing to the decline.
It's still your responsibility to educate yourself about fees and expense ratios. If you hold an unusually expensive fund, ask yourself if it's worth it.
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