Money Girl explains how mutual fund fees should influence your investment choices.
A Money Girl fan named Chris R. asks:
“My company recently changed 401(k) providers and I need to choose new mutual funds. There are target-date funds with expense ratios of 0.16%—but the stock and bond funds are charging around 0.12%. Is this a significant difference for someone who’s about 35 years away from retirement?”
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A mutual fund expense ratio is a measure of what it costs an investment company to operate a fund. It’s a percentage of the fund’s assets that are spent to run the fund each year.
Fund expense ratios vary widely depending on the type of fund and the expenses an investment company must pay—such as administrative costs, custodial services, taxes, legal expenses, and management.
Although a fund’s expense ratio isn’t the only factor you should consider before buying or deciding to keep an investment, it has a big affect on your return over time.
A typical ratio for an actively managed mutual fund is about 1.5% and a low one is about 0.25%. So, the funds in Chris’s 401(k) are very inexpensive, which is terrific! The difference between a 0.16% and a 0.12% fund ratio is negligible and shouldn’t influence his selection.
Since Chris has a long, 35-year time horizon before he’ll need to spend his retirement nest egg, he should invest aggressively. In a nutshell, that means allocating a majority of his 401(k) contributions to either the low-cost stock funds or the target-date funds that he mentioned.
For more information about picking investments, be sure to read How to Invest in the Perfect Portfolio.
You can use FINRA’s Fund Analyzer tool to find the expense ratios of over 18,000 mutual funds, exchange-traded funds, and exchange-traded notes. It estimates the value of the funds and shows how fees and expenses would affect investment returns.
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