Expense Ratio (Definition) - Why You Should Pay Attention When Investing

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Wilfred Poole
Expense Ratio (Definition) - Why You Should Pay Attention When Investing

Paying attention to the expense ratio associated with the investments you make will help to ensure that you don't become a victim of these profit-devastating fees. It's always worth the time to dig into the fees you're charged when you make an investment to ensure that they are reasonable.

  1. Why is expense ratio important?
  2. What is a good investment expense ratio?
  3. Should I worry about expense ratio?
  4. Why do expense ratios matter?
  5. How much money does an expense ratio cost me?
  6. How does an expense ratio affect me?
  7. Is expense ratio charged every year?
  8. How are expense ratios paid?
  9. How does expense ratio affect return?

Why is expense ratio important?

The most important fee to know when investing in mutual funds or ETFs. An expense ratio is a fixed fee mutual funds and exchange-traded funds (ETFs) charge investors to cover operating costs. ... 25% to 1% — expense ratios can significantly affect a fund's return, especially over time.

What is a good investment expense ratio?

A good expense ratio, from the investor's viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high. The expense ratio for mutual funds is typically higher than expense ratios for ETFs. ... For passive index funds, the typical ratio is about 0.2%.

Should I worry about expense ratio?

For mutual funds that invest in large U.S. companies, look for an expense ratio of no more than 1%. And for funds that invest in small or international companies, which typically require more research, look for an expense ratio of no more than 1.25%.

Why do expense ratios matter?

A mutual fund's expense ratio is very important to investors because fund operating and management fees can have a large impact on net profitability. ... Expense ratios for actively managed funds most commonly fall in the range of 0.75% to 1.25%, but some funds have much higher expense ratios.

How much money does an expense ratio cost me?

Overall, the average expense ratio is 0.48%, according to Morningstar's 2018 fee study. That's equivalent to $4.80 per every $1,000 invested. But expense ratios can vary widely depending on what kind of investments you have. What is an ETF and should you invest in one?

How does an expense ratio affect me?

An expense ratio shows how much money is being spent on administrative costs compared to how much is being invested. So the higher the expense ratio, the more money is being siphoned off in fees instead of ending up in your pocket.

Is expense ratio charged every year?

It is expressed as an annualized percentage of the fund's net assets. For instance, if a fund manages total assets (or AUM) worth Rs. ... However, you won't see this charge deducted annually because the daily NAV of the fund that you see is calculated after deducting the expense ratio.

How are expense ratios paid?

An expense ratio is an annual fee expressed as a percentage of your investment — or, like the term implies, the ratio of your investment that goes toward the fund's expenses. If you invest in a mutual fund with a 1% expense ratio, you'll pay the fund $10 per year for every $1,000 invested.

How does expense ratio affect return?

Expense ratio effect on returns

Since the expense ratio is deducted from your assets, it reduces your returns throughout the year and over the fund's lifetime. Of course, the higher the expense ratio, the bigger the cut it takes.


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