Expense ratios and investment fees | TigerDroppings.com

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dewster
Maryland Fan
Tennessee
Member since Aug 2006
9055 posts

Expense ratios and investment fees


Newb question.

How important do you consider expense ratios and investment fees to be when choosing a mutual fund?

I've seen some as high as 2.0% , and some indexed funds as low as .18%. On something as widely indexed as the S&P, what is there to justify the added costs for some of these funds. Why such a wide range for indexed funds?

This adds up to a significant number over time, even for a poor guy like me.....or I could just be too much of a stickler about this.



This post was edited on 1/25 at 9:09 am



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Broke
LSU Fan
AKA Buttercup
Member since Sep 2006
56324 posts

re: Expense ratios and investment fees


Well it's important to know what every fee and expense is going to be for a particular investment. A 2% is probably going to be a small cap international fund or some other growth fund where the managers have to do a lot of work. The low expense funds just mirror the index so the only work involved is the buying and selling of equities.





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wiltznucs
South Florida Fan
Apollo Beach, FL
Member since Sep 2005
7695 posts

re: Expense ratios and investment fees


Expense ratios can certainly be important but dont necessarily tell the whole story about how your money is being used by the fund. There are several hidden costs in mutual funds which you can read about online.

To the best of my ability I try to look for scope creep and the percentage of available funds that are being committed to investments as opposed to sitting in cash.

Scope creep occurs when a fund manager invests outside of the original intended area(buying large caps when you are in a mid cap fund) which is worrisome. Theres an element of risk here and in effect you are being mislead by the fund.

Any cash or cash equivalents the mutual fund is sitting on are not creating a return. This can be done to diversify and mimimize risk but can also negatively impact your return as that cash is not truly invested. You'd be surprised how much cash some funds have sitting around uncommitted.

If you dont feel like being terribly technical then using basic expense ratios is good. The fact that you are aware of the ratio means you are well ahead of the basic investor.






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LSUcam
LSU Fan
Destin FL
Member since Dec 2011
381 posts

re: Expense ratios and investment fees


Depends on what you want out of the investment (long vs short term, active vs passive management).

Basically for active management, your looking at paying .75-1.5% for a long-term A-share fund, and 1.3-2% for a more short-term C-share fund.

For passive management, your looking at .05-.75% for an indexed mutual fund/ETF.

Basically one says you are willing to pay slightly more for active management, because the extra return you expect to receive will compensate for the difference of the expenses, rather than having an indexed investment.







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